Foreign Exchange -
Currency OutlookThe drop in oil, commodity index, and equities yesterday could be the start of a bigger corrective move—or not. The
Reuters-Jeffries CRB index closed down 2.24% after posting a 7-month high on Friday. Oil has doubled this year. Everyone pretty much agrees that such big price rises were unjustified on the basis of any sane review of fundamentals and driven by too much "green shoots" optimism. For the price correction to last only one day would be unusual, given the size of the move - but alas, not unheard of.
We tend to think the corrective move will continue but confess our reasoning is inductive - the giant sell-off in the
Australian dollar, enough to break the trend channel. We hear from Australia that domestic conditions may look okay on the surface, but in reality, this is a lot of PR on the part of the government and regular folks are losing jobs and cutting back spending just as in the US. Old-timers say the
Swiss franc is what leads the market, but we have found in recent years that it’s the A$, possibly because it’s a commodity currency and a high-yielder, to boot. If traders are dumping the
Australian Dollar ezxchange rate maye it’s because they want less risk, whether funded by yen or
US dollars.
The important point here is that the makret is equally divided between those who see the
euros to us dollars at 1.4500-1.5000 and those who see it down around 1.2000-1.2500. As we wrote yesterday, it’s fairly easy to make the case for either scenario. What’s galling is that every day we get a reversal based on a new interpretation of Big Picture factors. This is unsustainable - isn't it? Technically, it’s hard to know what timeframe to look at. You get a totally different trading recommendation from the daily chart (
sell euros) than from the hourly (
buy euros) or the weekly, which also shows a rising trend. What may seem a false breakout in one timeframe is a legitimate breakout in another. It’s odd and unsustainable to have a
sell signal in the Australian Dollar Rate but not to get the same signal to
sell euros in pretty short order.
We are inclined to think the
euro exchange rate is capped around 1.4620, about a two-thirds retracement of the big
euro rate drop from 1.6037 last July at the height of crisis perception. But while we can make the argument for the dollar to recover to the end-Oct euro low around 1.2329, we don’t believe it, mostly because of the long-standing anti-dollar bias that uses any and every factor as “evidence” the dollar should be weak, even if the evidence points at exactly the opposite conclusion. For example, we just had China, Japan and Russia (well, the finance minister) offer powerful support for the
US dollar as lasting reserve currency - but one comment by the Russian premier cuts it all down? This is not reasonable. The market’s response to European banking sector woes is equally lame. This is a big problem that the
ECB is brushing off (and possibly under-counting), and the market is willing to let it go. We say prejudice is a powerful thing and the market finds it safer and more reliable to sell dollars when in doubt. It will take a shock, like a big equity/commodity correction, to change this bias, and even then, dollar rallies are shallow and short-lived.
From a trader’s persepctive, unless you can trade on the 10-minute chart, the wise thing is to stand aside. Trading on a 24-hour timeframe is proving to be too costly.
Pounds to US Dollars = 1.5305
Pounds to Euros = 1.1752
Euro to Pounds = 0.8050
Pounds to Australian Dollars = 2.0600
Bye For Now
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