The U.S. Dollar is expected to open higher across the board following a sharp rally overnight against all major currencies.  The rally in the Dollar started in Asia following a sell-off in the Japanese and Chinese stock markets.  

Some analysts attribute the break to the return of traders from summer vacation while others attribute the weakness to the possible “economic war” brewing between the U.S. and China.  

Although the traditional end of summer vacation is Labor Day, last week featured light volume which was an indication that many traders were still on the sidelines.  Last week’s huge sell-off in the Dollar was discounted by some who felt the light volume indicated the absence of a major seller.  Dollar bears basically had their way with the Dollar.  Last night’s action indicates that last week’s action may have been overblown and that the Dollar may rally back to a more acceptable valuation.

Traders cite the confusion over the strength of the global economic recovery as a reason to buy the Dollar.  Some feel that there is not enough evidence of a strong recovery in the world to be too pessimistic on the Dollar.  Furthermore, excessive speculative demand for higher risk assets may be completely unwarranted until more solid evidence of a global recovery is presented in economic reports.

Another factor contributing to the weakness in global equity markets and the subsequent rally in the Dollar is the possible “economic war” between China and the U.S.  Last week, President Obama surprised Chinese officials by raising taxes on the import of Chinese manufactured auto tires.  China reacted by calling this move protectionism.  This reaction has made traders nervous about holding higher risk assets on the thought that China would implement economic sanctions of its own to combat the move by the U.S.  An aggressive move by the Chinese at this time could curtail economic gains in both countries that would slow down the recovery process.

In addition to this weekend’s global events, traders will have a chance to react to today’s U.S. economic events.  Today’s Producer Price Index, Retail Sales and Business Inventories Reports could be market movers.  Traders are expecting slightly better numbers in Retail Sales and Business Inventories as improvements in the economy are expected to boost the confidence of consumers and businesses and encourage more spending.

The September British Pound is getting hit hard overnight as many traders felt last week’s rally was overdone to the upside.  The U.K. economy is still in bad shape and last week’s action by the Bank of England to leave rates unchanged did nothing to improve the economic picture.  

Technically, the September British Pound failed near a major retracement level at 1.6687.  The current chart formation suggests a break back to 1.6422 to 1.6347 is likely.

The September Euro also stopped at a key retracement zone at 1.4538.  Diminished appetite for risky assets is leading to a sell-off this morning, but this market is in no danger of changing the trend to down unless the bottom at 1.4047 is violated.

Equity markets are expected to open lower this morning following a weaker trade in Asia and Europe.  Now that the summer season is officially over, trading volume is expected to increase which could mean the start of a substantial sell-off.  Many traders feel that the recent run-up in equity prices was unwarranted, given the state of the U.S. economy.  A cheaper Dollar is said to be the driving force behind the rally rather than prospects of improved corporate earnings.  Traders now feel that the current pace of the rally may be unsustainable until more solid evidence of a U.S. economic recovery is presented.  If traders feel equity markets are overpriced then look for a sell-off which should take prices back to more acceptable levels.

Despite the weakness in the equity markets overnight, December Treasury futures are called lower.  Last week’s auctions were well received by investors which kept pressure on yields.  The overnight weakness could be traders looking ahead to the growing deficit and the prospect of higher interest rates.  A substantial sell-off in the equity markets could lead to a flight to safety rally in bonds and notes today.

December Gold is called weaker due to the strength in the U.S. Dollar.  Although this market produced substantial gains over the past two weeks, the rally appears to be labored and highly speculative.  This leaves the precious metals susceptible to a sharp decline especially if the U.S. and China’s economic issues heat up.  

Supply and demand factors continue to control the direction of the energy markets.  December crude oil is called weaker this morning as traders await more concrete evidence that the global economy is in recovery mode and ready to increase its energy demand.  Last week’s rally looks more like short-covering and a reaction to the weaker Dollar.  A stronger Dollar today is likely to pressure the energy complex.   


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