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Stocks Hold on to Gains despite Strong Dollar

James Hyerczyk from ForexHound.com at 12/11/09


The December E-mini Dow and December E-mini S&P 500 posted strong gains on Friday but closed unchanged for the week following the release of bullish retail sales and consumer confidence reports. Both reports indicate the economy is on the road to recovery and could give the Fed enough evidence to issue a more hawkish statement at its next meeting on December 16th. The S&P 500 closed above a retracement zone, indicating possible strength next week.  The upside target for this market remains 1122.00. A bearish scenario could develop if Dollar traders aggressively begin to unwind carry trade positions.


March Treasury Bonds and Treasury Notes finished the week sharply lower as investors drove up yields because of concerns over the mounting U.S. debt.  This week’s Treasury auction ended on a sour note when investor demand for 30-Year Bonds was lower than expected.  Today’s friendly reports did not help matters because they may have given the Fed the confidence it needed to hike interest rates.


The stronger Dollar hit the February Gold market hard this week, sending it within striking distance of a 50% level at $1107.40.  A break through this price could trigger a further decline to $1079.00.  The heavy volume in this market the past two weeks indicates that speculators are selling out of long positions with both hands.


March Crude Oil finished the week lower after posting its seventh consecutive lower top.  Up trending Gann angle support stopped the decline today.  This angle moves to 73.46 next week.  The close on the bear side of a retracement zone at 75.25 to 73.63 is an indication of weakness. Lower stocks, a higher Dollar and bearish supply and demand factors are helping to contribute to the weakness.


Dollar bulls who wanted to see growth in the labor market and an increase in consumer spending received the latter in the form of a better than expected retail sales report and a jump in consumer sentiment. The bullish response by investors to the friendly retail and consumer confidence numbers is a sign that speculators believe the Fed has enough evidence to hike interest rates sooner than expected.


The U.S. Dollar soared to the upside to finish the week sharply higher after the government reported better than expected retail sales in November.  The increase was more than twice pre-report estimates.  The Greenback received an additional boost after the University of Michigan reported a greater than expected uptick in consumer confidence.


The March Euro turned the weekly main trend down today when it crossed the main bottom at 1.4625.  The current break has already tested 50% of the 1.4045 August bottom to the 1.5144 November top at 1.4594.  A further break to 1.4465 is likely if downside momentum continues to build.


Besides signs the U.S. economy is improving, the Euro was pressured all week by credit rating downgrades in Dubai, Greece, Spain and Portugal.


The March British Pound finished the week lower.  The short-term range is 1.5706 to 1.6878.  The retracement zone of this range at 1.6292 to 1.6254 was tested this week and held.  Most of the damage done this week occurred on the daily chart.


This week the Bank of England agreed to leave interest rates unchanged as well as its quantitative easing program. With Third Quarter GDP on life-support, the BoE feels that the economy needs stimulus to help it turn the corner.  The major concern for British Pound traders is the growing budget deficit and the ability to pay sovereign debt. Traders are worried a credit rating service will downgrade U.K. debt. This is speculation at this time, however.


After starting the week strong, the March Japanese Yen collapsed on Friday following the release of the bullish U.S. Retail Sales Report.  The Yen also faced additional pressure this week from a report showing Third Quarter GDP grew smaller than estimated, Core machinery orders fell, consumer confidence was down and the government approved a 7.2 trillion Yen stimulus package.  The unwinding of the carry trade could put additional pressure on the Japanese Yen next week.


The Swiss National Bank announced this week that it would leave interest rates unchanged while signaling an end to its bond purchasing program.  It also left open the door for more interventions should the Swiss Franc appreciate too much.  The SNB feels that with the economy just now pulling out of the recession, it remains too fragile to begin hiking interest rates.  Technically, the main trend turned down on the weekly chart when the March Swiss Franc broke support at .9690.


The March Canadian Dollar finished a little lower this week, but most of the action was spent inside of a pair of 50% price levels at .9504 to .9446.  The Bank of Canada decided this week to leave interest rates unchanged while calling the currency too expensive.  The BoC has expressed concern previously about the Canadian Dollar’s value and its negative effect on exports.  Speaking of exports, Canada’s trade balance showed a surplus last month mainly because of the surge in gold and silver.  This news helped underpin the Canadian Dollar late in the week.

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