Merkel’s huge in-tray

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Dollar indecision. For some time now it has not been easy knowing how to trade the USD. In dollar index terms, the currency is essentially just where it was ten weeks ago and moreover, the trading range over that time has barely been 2%. Notwithstanding the summer hiatus which can produce these very tight ranges and listless trading conditions from time to time, there are some other explanations which account for this moribundity.

First, there is less conviction regarding the health of the US economy, despite the most recent payrolls figures. With America facing a debilitating fiscal cliff later in the year, unless Washington can get its collective act together, this is a justifiable concern; many American company executives are chagrined by this prospect and it is already a factor in their corporate decision-making.

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Second, more Fed policy-makers are leaning towards another adrenaline shot of QE. San Francisco Fed President Williams is the latest to add his name to the QE3 register, claiming it is necessary to boost the economy (Williams is a voter on the FOMC this year). Both Boston Fed President Rosengren and Chicago head Evans have made similar demands in recent weeks. Third, the flight from the euro, which was such a feature of forex markets in the first half of this year, has slowed somewhat recently, although this might be simply a function of the summer lull.
Once proper volumes return in a few weeks time, the real underlying mood music in forex markets will be audible. Given the intractability of many of Europe’s problems, it would not be surprising if this realisation did not result in further safe-haven demand for the dollar.

Danger for lazy Aussie longs. This month’s price action contains some critical warnings for traders. Over the past couple of weeks, the Aussie has attempted and failed to get through the 1.06 level sustainably, despite the fact that traders have been adding to their positions. According to the latest CFTC data, Aussie longs are now back to where they were in early May, prior to a huge 9% sell-off over the following five weeks. The Australian currency has lost the upward momentum it enjoyed throughout June and July, it is well above all of the major long-term moving averages (which at times can act as a magnetic force) and the series of favourable local economic data released recently has probably run its course. Also, as we have observed previously, over the past year the 1.06 area has often been a good area to get short the AUD. For lazy Aussie longs, the risks are currently much higher than they were a few weeks back.

AIG flees the eurozone. Further evidence of corporate sector euro-abandonment emerged from a quarterly filing by US insurer AIG. An interesting piece in yesterday’s Daily Telegraph claimed that AIG’s holdings in German sovereign debt fell 16% in the first half of the year, and that the company also significantly reduced its exposure to Italian, Spanish and French bonds. In contrast, UK gilt holdings doubled to nearly USD 3.4bn. Over recent weeks, many major companies in Europe have been much more prepared to vocalise their misgivings regarding credit risk in Europe. Last week Shell stated that it was reviewing its credit relationships throughout Europe. This process surely has a lot further to run, and as such could continue to weigh on the single currency.

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