Dollar Shows relative Weakness due to Stronger Techs

Even though most of the major averages presented a lack of movement last week, the NASD composite continued to show relative strength, breaking out to new highs on lighter than average volume.  The NASD composite closed the week up by 0.39% at 2028.  The catalyst for the strong move was the positive news relayed from Intel Corp (INTC), which raised sales forecast for the following quarter to 8.8 billion dollars from the prior forecast of 8.1 billion dollars. The Intel news, which was a bright spot, created a buzz that news headlines are now turning positive. Dell also had its say last week as the stock soared during the session on better than expected earnings. Revenue and profit both edged past Wall Street’s expectations. Gross margin expanded by nearly a full percentage point from the first quarter's level, and by 150 basis points (1.5%) from last year's.

During the week the broad markets tested new highs as President Barack Obama announced that he would reappoint Federal reserve Chairman Ben Bernanke for a second term.  The market saw this news as positive, but higher futures prices did not produce strong gains during the day.
 

Shanghai Was Closely Watched

Not only the U.S had an influence on the global markets last week as the Shanghai index consolidated and finished the week down 0.49% at 2946.  The Shanghai index was closely watched by investors as it managed to hold its 200 week moving average, after correcting a major part of its 2009 rally. When observing the chart more carefully one can see that there seems to be descent support level at the index’s 38.2% Fibonacci retracement level.  The (2850) Fibonacci and (2779) 200 week moving average coincides with a weekly trend line that is also currently acting as strong support.  A break of this level on a weekly closing basis will be very negative technically and could see a future retracement of the SSEC index. One must note that a drop on this index could cause volatility and risk aversion on all the tradable markets. Furthermore, by taking a look at the chart one can see that the drop at the start of August had a major impact on the currency and equity market, sending investor’s back into safe-haven. Could this reoccur?


  

Not all the Data is Positive

From a fundamental point of view, a mixed bag of economic data was released last week, something that weighed on the market’s direction. Housing data released during the week was positive and portrayed a continuing healthier picture on the US housing market.  New homes sales increased 9.6% to an annual rate of 433,000 and the Cash Schiller Housing numbers showed an increase in 18 of 20 major metropolitan areas.

The weak ended with disappointing confidence data.   The latest Reuters/University of Michigan reading of consumer sentiment slipped to 65.7 this month, down from 66.0 in July.  This information placed an immediate damper on positive momentum. Furthermore, the Commerce Department reported a 0.2% increase in consumer spending, which was mainly a function of the “Cash for Clunkers” program. One must note that the consumer spending figure could continue to weigh on investor’s at the start of this week as the figure showed analyst’s that recent consumption was government driven and not due to an improving economy.

The Dollar Weakens but still holds on

The dollar continued to slip this week against the Yen and the Euro, but showed some strength against the Canadian dollar.  During the week there were some warnings of downside risks to the US dollar.  Joseph Stiglitz, the former White House economic advisor and World Bank economist, warned of the downside risks to the dollar and proposed a new international monetary regime because the current reserve system is fraying.   Despite that fact, with the dollar share of world reserves remaining relatively constant at approximately 65%, many still don’t see any candidates for a Dollar replacement, as Stiglitz warned. 

From a technical point of view the Dollar index managed to find support around recent levels after crashing during the weak


 
On individual pairs the EUR/USD closed at the upper end of the weekly range again testing the 1.4350 level.  The market seems to be consolidating around the 50 daily moving average which is currently priced at 1.4144.  The USD/JPY continued to trade on the defensive side and tested weekly support at 93.50.  The USD/JPY has followed the 50 week moving average and the average has acted as strong resistance level as shown on the chart below.

EUR/USD – Daily Chart



USD/JPY –Weekly Chart


 
The dollar did show some traction against the Canadian dollar this week, rallying to a weekly high of 1.0914.  Current resistance of 1.0946, the 100 week moving average will be tested by traders next week.


 

Upcoming Economic Data

Even though the economic calendar is packed with data next week, the U.S will continue to grab the center of attention:

• On Monday the Chicago PMI will give a gauge of manufacturing in the Midwest
• On Tuesday, the ISM will release the national manufacturing index
• On Wednesday ADP will release information on private employment
• On Friday the Department of Labor will release the employment report.