Despite today’s nice bounce-back in equities and continued reversal in oil (up nearly $4.50 from yesterday’s lows) and last week’s news that France and Germany have beaten the US out of recession, EUR/USD has yet to retrace even a third of the its slide from range tops at 1.4445.
We can assume a few factors are helping to give the dollar a somewhat firmer perch in recent days. Number one in my book is the fact that the US continues to sell vast quantities of newly issued Treasury bonds at historically low yields, a sign that foreign investors continue to belly up to the auction window (and that US investors are eating more of their own cooking).
Also helping are conflicting signals from Chinese officials. The official line is that China maintains an appropriately loose monetary policy but lending standards seem to be tightening among Chinese banks, a key factor in the recent 20% decline in the Shanghai composite.
The other factor is fears that the stimulus and inventory-led rebounds in global growth will run out of steam early next year. Financial markets are discounting mechanism and we may very well have fully discounted the rebound that is only just beginning to take place. We may be beginning to discount the slowdown to come as the US consumer remains very much on the sidelines and likely will remain there until employment trends strengthen significantly.
Keep an eye on tonight’s close for confirmation that the 10 and 21-day averages have indeed crossed bearishly. That could lead to model sales tomorrow.