Despite the release of bearish US data, the US dollar was strong across the majors for much of the day as risk aversion remained the predominant theme.
In fact, the US trade deficit widened to the most in 16 months in July, while US import prices fell in August by the most since record-keeping began 19 years ago due to weaker commodities and a strong greenback during the survey period. As Quantitative Analyst David Rodriguez discussed this morning, the CFTC's latest Commitment of Traders report shows that speculative US dollar longs have gained to their highest levels since late 2005, which is a clear sign that forex trading sentiment has become extremely bullish the US dollar. Though short and medium term momentum remains in its favor, the exceedingly high level of speculative forex future long positions increases the likelihood of sharp pullbacks, like we saw at the end of Thursday’s US trading session.
Indeed, the move may indicate the beginnings of a turn, as the DJIA rocketed higher during the final 30 minutes of trading on news that Lehman Brothers was in talks with prospective buyers. Likewise, high-yielders and the JPY crosses picked up as well, and if this sentiment holds overnight and into tomorrow morning, the release of US Advance Retail Sales and the Producer Price Index could play well into the hands of dollar bears. According to Bloomberg News, retail sales are forecasted to edge slightly higher during the month of August, though excluding autos they are anticipated to fall. There is significant downside risk for this release, as wholesale sales slumped 0.3 percent during the month, while International Council of Shopping Centers (ICSC) sales slowed to a 1.7 percent annual pace in August from 2.5 percent thanks to a pullback in spending on discretionary items such as apparel and furniture. Meanwhile, as we saw in the release of the import price index, the plunge in commodities during the month of August resonated throughout the markets, and as a result the Producer Price Index for that month is likely to plummet as well.
Related Articles: Forex Trading Speculators Sell US Dollars - Will Rally End?, US Inflation Pressures Cool and Trade Shortfall Grows
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