USD: sentiment-shift or over-bought?

The Greek debt crisis is hanging over the worlds riskier assets like a dark cloud with the potential to unleash ‘catastrophic’ effects on the already-terrified financial markets according to Timothy Geithner at the IMF conference this weekend. The fact that the USD had rallied higher over the past week than it had done for 16 months represents something of a dramatic shift in sentiment in an already bearish community of traders and investors. The potential for ‘catastrophe’ was a sentence that would have reverberated in the minds of those who, throughout a sleepless weekend, were still desperately holding onto risky positions, such as the Aussie dollar, in the faint hope that Germany and the US would put its arm around Greece and reassure it and the rest of the Eurozone that things would be ok.

The fact is that we have not seen anything quite like this Monday for a long time. Unique because not only it is one of the quieter weeks in terms of planned news releases but also because it has arrived after such a tumultuous and potentially pivotal trading week.  After the USD’s dizzying rallies of last week, normally the last resort for many as the ultimate safe haven, there was an almost unanimous expectation that it would continue on its upward march. An expectation buoyed by the premise that if people are buying dollars they are either 1. really scared, 2. furiously selling gold; or 3. both. Compounding the demand for the USD further was certainly a distinct possibility after the announcements of Geithner and the fact that gold has been tumbling from its overextended highs at the same time. However, several savvy analysts pointed out over the weekend that even the perfect storm of sentiment change rarely happens like a wishbone and a small pause for breath would be needed if we were really going to see an absolute move to risk aversion.

EUR/USD Intraday 26/09/2011

EUR/USD Intraday 26/09/2011

The USD and the riskier currencies today did begin as expected, sharply moving in the directions anticipated by the big grey cloud and calls of financial doom and destruction over the weekend. Despite this, the Ifo German Business Climate report stated healthy results giving a controversial and novel hint of good economic health to parts of the Eurozone. The Euro clawed back a large part of these initially losses by the end of the day. The fact that gold rush seems to have topped out and now looks like a less attractive buy as a relatively expensive safe haven may go further in explaining the demand for dollars towards the end of last week, considering that the European debt crisis has been both rumbling on for a while and the markets have been predicting imminent default for quite some time. If this is the case then we are very likely to see a short-term correction before the USD really shows us that the trading community has shifted to seriously risk-averse sentiment. The stabilisation of Gold prices will also give an interestingly honest picture of where the dollar is heading.

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