Risk Aversion Remains As Key Players Look To Undermine The US Dollar’s Central Role

As we draw nearer to this year’s half-way mark it is clear that reports of a V-shaped recovery back in March we’re greatly optimistic. The sheer complexity of the global economic crisis and it’s repercussions on business climate has greatly hampered the economy’s ability to right itself. The rapid cutting of interest rates, vast amounts of liquidity injections have central banks tackling deflationary fears. Initially the U.S was ahead of the curve, but as Europe remained headstrong on not cutting interest rates to desperate levels and Green shoots were emerging the EURUSD jumped 15% - culminating at 1.4337 on the 3rd of June. Since then risk aversion has crept back into the picture - slowing demand, dwindling sales and flurry of bankruptcies has exacerbated that fact.

The EURUSD has traded a broad 1.3750 - 1.4150 range for the past month as the pair attempts to find direction. The broad scale wedge we saw earlier this year saw the pair break upwards at the beginning of May as stock markets rallied. European confidence came in better than expected this morning and is at it’s highest since November 2008. The indicator rose to 73.3 against the 70.2 may reading - adding signs that record low interest and stimulus measures in the EU is really helping the 16 nation region pull out of this recession.

The BIS’ annual general meeting this weekend saw the emergence of talks between China and Brazil on how to bypass the dollar for trade between the two countries. The premise for this agreement is to limit the importance of the U.S dollar as the dominant global reserve currency, one analyst saying the substantial debt the U.S had incurred during the crisis that originated on it’s shores would be a “heavy burden on the dollar”. As a consequence the long-term outlook by major financial institutions has shifted - strong dollar in the short/medium term but definite dollar weakness as we pull clear of these current economic woes. Initial talk along these lines spoke of the IMF’s SDR replacing the dollar as a global reserve currency, now it seems the focus has shifted to limiting the dollars importance by favoring more direct swap methods.

EurUsd 1.3880 - 1.4140 range persists with strong support at 1.3984. We see potential for a test of the 1.4120 resistance but continued consolidation and a failure to break 1.4100 would refocus the 1.3800 handle.

GbpUsd 1.6550 is next crucial resistance (double top) - move past 1.6470 would focus 1.6230 - however breaking away from current ranges will take some impetus. 1.6600 has stood for some time, we expect the pair higher in the mid-term.

UsdJpy Pair consolidates and trades a tight 95.33 - 95.60 this morning as broader 94.90 - 96.60 range last week persists. Clear bearish trend finds support at 95.33.

UsdChf remains broadly capped around 1.1000 indicating that outside the central bank there is not a lot of interest to pay up for the dollar. Indeed if USD/CHF were to slip back below support at 1.0875 then it would suggest a dip back down to 1.0700 and range trading thereafter. <!–

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