Dukascopy Afternoon Forex Overview – Oct 12 2009

Previous session overview

The dollar is likely to continue to sink next week amid growing appetite for non-U.S. assets and signs of apparent official resignation at the dollar’s decline.

Mounting faith in economic recovery has reduced the dollar’s safe-haven appeal, while global interest-rate dynamics have fostered the use of the dollar as a funding currency for riskier investments.

The lukewarm lip-service paid to the dollar’s decline in recent statements by some international monetary officials doesn’t pose much of an obstacle to the U.S. currency’s slide, either.

Moreover, if companies continue to report encouraging results in the slew of corporate earnings reports on tap next week, the euro and other higher-yielding currencies should gain ground on the dollar.

The dollar received a day of respite Friday, rising against the euro and yen as investors took profits and adjusted positions ahead of the long weekend due to holidays Monday in the U.S., Canada and Japan. However, the rally isn’t expected to last.

The Swiss National Bank must be sighing with relief as confidence in the global economic recovery rises and investors start selling low-yielding currencies, such as the Swiss franc, in favor of higher-yielders, such as the euro.

Market expectation

Against this background, analysts expect the euro to trade between USD1.47 and USD1.50 in the coming week, while the U.S. currency fluctuates between JPY87.50 and JPY91.0.

EURGBP pullback off earlier traded highs at stg0.9350 sees rate meeting demand interest around the broken resistance area at stg0.9325/20. Rate currently trades around stg0.9328. Move seen as cable extends its recovery off earlier lows at USD1.5728, moving up to USD1.5835 but holding just shy of earlier Asian highs at USD1.5843. Offers are noted between USD1.5845/50. Through here and earlier highs at USD1.5883 may move back into view.

USDJPY – pullback from earlier highs just shy of JPY90.50 now extending towards JPY90.00 where light bids are noted, in line with expiry interest for the NY cut today. A break below to expose retracements of the bounce from last week’s JPY88.01 lows to today’s high at JPY89.88, JPY89.52 and JPY89.23. Topside stops still noted at JPY90.50/70.

The prospect of U.S. rates remaining at ultra-low levels for a while longer yet is one important element, along with rising risk appetites, in the dollar’s increasing use as a funding currency, whereby investors borrow dollars on the cheap and use them to finance bets in riskier currencies and other assets.

These trends have in recent days brought the dollar to the brink of some significant levels against the euro, yen, and other currencies. Moving beyond these levels in the near term would likely add further impetus to the dollar’s downtrend, according to most currency watchers.

Movers & Shakers:

Important levels:

Source: Dukascopy