The Dollar Gains Strength As Solid Data Raises Yields

dollar etfThe dollar (NYSEARCA:UUP) has been the focus for most currency traders over the past three weeks as yields in the US moved higher, breaking through resistance levels and driving currency traders into the greenback.  Higher yields in the US are generally more attractive and make it difficult for traders to short the dollar as they need to pay away interest for this privilege.  Recent US data has been mixed showing solid gains for second quarter numbers, but weak results in the first quarter.

The recent released of economic data in the US has been mixed, pointing to solid gains in the second quarter which has been driving US yields to levels not seen since 2011.  Strong durables goods number released on Tuesday showed an increase in items that will last at least three years by 3.6%.  Additionally on Tuesday new homes sales increased by 2.1% to the highest levels since July of 2009, and home prices reflected by the Case Shiller Housing Price index increased by 3%, to the highest levels on record for that index.  Clearly the housing market is gaining traction which should spill over into growth in the second quarter.

Surprisingly first quarter growth was revised lower, which put an end to the torrid gains in the greenback.  On Wednesday the Commerce Department released their final revision to first quarter growth.  GDP increased by 1.8% in the first quarter revised down from the 2.4% initial estimate.  A revision would normally be overlooked, but one that showed a .6% decline was noticed by all.  The main contributor to the decline in GDP was the .8% decrease in consumer spending from 3.4% to 2.6%.

Second quarter consumer spending on the other hand seems to be increasing as reflected by the most recent release on Thursday.  US consumer spending increased by .3% slightly better than the .1% increase expected by economists.

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The stronger than expected economic data in the US has been driving the interest rate differential between the US and Japan to the highest levels seen in the past 5-years.  The current 10-year differential has reached 1.7%, which should push the dollar even higher than current levels.  The outlook for rates are in favor of the US as the economy in the US is much more likely to improve over the near term that the Japanese economy.  The Japanese are at the beginning of their aggressive bond purchase program compared to the US which is already 4 years into the process.

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The USD/JPY currency pair is beginning to stabilize after falling nearly 10 big figures form the middle of May to the middle of June (chart courtesy of Banc de Binary).  With the 5-day moving average of the currency pair crossing above the 20-day moving average a short term trend is now considered in place.  Momentum is increasing to the upside with the MACD (moving average convergence divergence index) generating a buy signal this week as the index moved from negative to positive territory.  The MACD is printing in positive territory which is also positive for price action.

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