Oils next stop is sub-$100 and time to Buy US Dollars again.

Foreign Exchange Currency Outlook : It’s only normal to expect a pullback in a two-week rally. Prices simply do not move in a straight line indefinitely. We thought we saw it coming last week but it was only the slightest of burps, perhaps because the market is quite thin due to summer vacations. Is it true that the bigger the move, the bigger the correction? Yes, probably, but each one is slightly different and anyone who says it will be 23% or 38% or some other number is full of hot air. A lot depends on the reason for the correction.

Any old reason will do, whether it’s a good one that justifies a counter-trend move or not. This time, if it’s a temporary rise in the price of oil and other commodities, it will be taken seriously—but those markets have their own dynamics, too.

We are still trying to understand why oil fell so hard, and if the oil market traders think those are good reasons, the oil slide will continue.

We say that if oil breaches the most recent lowest low from May 1 of $110.30, the next stop is sub-$100 and the US dollar is golden.

The main economic consequence of falling oil is a reduction in inflation and inflation expectations.

That takes heat off the Fed but more importantly, it takes heat off the ECB and thus makes a cut in Q1 a more reasonable forecast. While normally we want to see the Fed in hawkish mode, it also serves to see the ECB is more dovish mode. Note also that falling inflation globally hastens expectations for rate cuts in Australia and the UK.

To think about the bigger picture, consider two pieces of data in one breath—last week it was reported that the eurozone economy contracts for the first time ever since the euro came into existence in 1999. On Friday, the Reuters/University of Michigan index of consumer confidence rose to 61.7 in early August from 61.2 in late July.

So, correction or not, we want to stay focused on the opportunities for the US dollar to hang on to its rally (instead of looking for reasons for it to end).

Bye for Now

Barbara Rockefeller

Buying US Dollars and want the best exchange rate

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