US dollar seen higher this week

The USD remains in demand and seems to be in a short-term win – win position. In the case of the Asian situation becoming even harsher the USD will act as a ‘safe haven’ unit. On the other hand recent economic statistics have played into the hands of investors believing in a soft landing of the US economy.

The 810k upward revision of US employment data suggests for many market participants that the economic rebound over recent years has not been that different from previous cycles – hence they view economic downside risks as overblown.

The USD will remain in demand for now as this week’s US release calendar is unlikely to change the markets soft landing perception. Fed minutes on Wednesday are likely to be in line with recent talk of FED officials. The Beige Book on Thursday might note some consumer relief due to lower energy costs and Friday’s retail sales report is unlikely to surprise negatively given the stronger car sales and indications from US retail chains.

FED’s Poole indicated that the fall in long-term bond yields has reduced the pressure on the FED to respond immediately to signs of economic weakness. However, Yellen pointed out that she found the pace of the housing market correction ‘surprising’, but that upside inflation risks have remained.

Ex Fed Chairman Greenspan said that the ‘worst of the housing market correction is probably over’. We regard this as lip service from the man who is responsible for the biggest asset and liability bubble in history.

The latest IMF report on the Gulf Cooperation Countries provides additional support for the USD. The report noted that the regions rising current account surpluses of USD 239 bln for this year and projected USD 259 bln for next year are invested in USD based assets, including asset purchases in countries de facto pegged to the USD.

Most majors have approached key levels. We watch USD/YEN 119.40, Cable 1.8605, EUR/USD 1.2550 and USD/CHF 1.2660 and a break of one of these levels should be viewed as triggering a daily USD buying signal. Better not to trade against the USD this week.