Search ForexCrunch
The Almighty Dollar is looking almost unstoppable. As we go to pixels, the oft-maligned global reserve currency is trading near 11-year highs, driven upward in the belief that yesterday’s strong inflation and durable goods numbers will help to push the Federal Reserve off the sidelines toward an interest rate hike during the summer months. Data from January showed that core prices rose 0.2%, and durable goods orders surged by 2.8% – almost twice what had been expected.
Warning bells should be ringing in corporate treasuries though. Foreign exchange traders are a claustrophobic lot, and when too many of them cram themselves into an elevator at the same time, you can expect problems. With sentiment almost universally bullish, the long-dollar trade has become one of the most crowded trades we’ve seen in years.
A number of catalysts could trigger a temporary volte-face. Today, month-end portfolio rebalancing could compel some to sell dollars and capitalize gains. In the coming months, rising euro-area surpluses could cause the common currency to rise, unwinding carry trades into the United States and driving the dollar down. A resurgence in American consumer demand might generate gains in the country’s largest trading partners. Or, a repeat of the strong early/weak later phenomenon seen for the last five years could take the wind out of the economy’s sails and set rate hikes back.
Regardless, it would be wise to consider establishing risk thresholds and upside take-profit levels now, so that volatility is harnessed effectively.
Across the pond, European shares are at a seven-year peak, as corporate profits continue to surge higher. The euro itself is weakening as investors position ahead of the European Central Bank’s bond purchases, which are expected to begin over the coming weeks. For foreign exchange traders, the 1.10 mark has a target painted on it, and sheer momentum appears to be carrying the currency toward it.
Canadian dollar trading is incredibly boring this morning, with the currency tightly rangebound after the tumult earlier this week. West Texas Intermediate is oscillating around the $50 handle, keeping emotions in check on either side of the USDCAD pair – for now. Speculation is rising around the March 4th Bank of Canada announcement, with many analysts effectively using coin tosses to predict the outcome. In the event that the institution pauses, we could see a run toward 1.20, while another cut would likely kick the currency in the opposite direction. Either way, it is important to remember William Arthur Ward’s advice; “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails”.

In this week’s podcast, we cover  Yellen & the hike, AUD & CAD rate previews, Jobless claims vs. USD & Greek back burner

Subscribe to our  iTunes page