USD finally showing signs of resilience - could the rally extend here

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• US Weekly consumer confidence dropped to -21 vs. -18 expected and -19 previously - the lowest reading in over 2 years
• Trichet says in India that he does not welcome "brutal" moves in currency markets.
• Japan Oct Retail Trade rose 0.8% YoY vs. 0.7% expected.
• Australia Q3 consruction Work Done rose 2.8% vs. 1.7% expected and Oct New Home Sales rose +0.8% vs. +9.9% in Sep.
• UK GfK Confidence for Dec fell to 4.3 vs. 4.4 expected.

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• Sweden Oct. Retail Sales (0830)
• Switzerland SNB's Roth to hold speech (0915)
• Switzerland Nov. KOF Swiss Leading Indicator (1030)
• US MBA Weekly Mortgage Applications (1200)
• EU ECB's Constancio to speak (1230)
• US Fed's Kohn to speak (1300)
• US Oct. Durable Goods Orders (1330)
• US Oct. Existing Home Sales (1500)
• US Weekly Crude Oil and product inventories (1530)
• US Fed's Fisher to speak (1800)
• US Fed's Beige Book (1900)
• New Zealand Building Permits (2145)
• Japan Oct. Industrial Production (2350)
• Japan Small Business Confidence (0500)

Market Comments

The USD is breaking stronger this morning - this time, finally, versus the broader market as resistance levels versus EUR, CHF and GBP all fell simultaneously this morning. This rally could extend as yesterday was one of those days in which new inputs that should theoretically be very USD negative - another surprisingly large fall in Consumer Confidence and weak housing price data - failed to have any effect. This divergence in input vs. the reaction was the apparent tip-off for the USD strength we are seeing this morning. The question we look at now is how far it can extend. Looking at the major USD/Europe crosses, there appears to be plenty of room for a sizeable consolidation without threatening the overall trend. The first key support for EURUSD, for example, is 1.4750, which is breaking as this is being written. If this level falls into the close, we could see a further move back to 1.4600 and even 1.4350 eventually.

The Fed rhetoric from Evans and Plosser was consistent with other recent rhetoric from the Fed, which suggests a "balanced risks view" and head-nodding at the inflation risks of a weak USD. Plosser was particularly hawkish, stressing inflation risks a bit more prominently and promising that rate hikes would be necessary if inflation data warranted.

Looking at the slightly active data calendar today, one could see the USD rally extending sharply if we see a confluence of big energy inventory builds (Saudi's are out with some pretty strong rhetoric that has helped this very large correction in crude as well), positive Durable Goods Orders, and a continued positive outlook from the Fed in its Beige Book report. Also watch to see if the US financial stocks recover - if we see a sharp bounce in this sector, this could mean that USDJPY joins the "consolidation crowd" as well and quickly extend to higher resistance levels. 109.10 held on the first try late yesterday, but could fall if tested again today.

Trading Strategies/Charts

We've seen a big break higher in USDCHF today and we show a USDCHF chart to give an idea of how far the USD rally could extend in the short term without really threatening the overall weak USD trend just yet.

USDCHF - the short term resistance level at 1.1070 gave way this morning and the pair is off to the races higher so far today. The first Fibo is all the way up at 1.1272 and a 50% retracement could take the pair to 1.1400 - all without threatening the overall weak USD trend. A move all the way back above 1.1600+ is needed for that....