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Guess The Year
 

  1. US Interest Rates at 45 year record low of 1% and core inflation rate of 37 year record low 1.3%.
  2. Toyota overtakes Chrysler to get the number three slot in US Car Sales.
  3. Voters recall Governor Gray Davis from office and elect Arnold Schwarzenegger to succeed him.
  4. President George W. Bush on the aircraft carrier USS Abraham Lincoln announces major combat in Iraq is over.
  5. Justice Roy Moore, is suspended when he refused to take down the Ten Commandments from an Alabama state justice building.
  6. Movies at the time included; The Lord of the Rings: The Return of the King, Pirates of the Caribbean: The Curse of the Black Pearl, Bruce Almighty, and Lost in Translation.

The year was 2003, and looks as though the more things change, the more they stay the same…

The forex markets hive absorbed a lot of mechanics in June including the largest increase in the interest rate spread between U.S. Treasury 2 year and 10 year notes since 2003.

Looking back to that time there was a similar pattern of economics in place that is here now; the dollar was coming off a period of strength that was getting reversed, the Federal Reserve were deep into their open market operations, the housing market was oversold, tax incentives were in place, unemployment was increasing, and interest rates were at all time lows.

Sound familiar? The dollar lost ground to the euro at that time, and the common currency added nearly 50% to its value from then, moving from 1.1000 to 1.6000 over the following four years.

The euro is at the 2004 area at 1.3950 right now, and as such it seems that it may not be too difficult to replicate the second leg of that 2003 move, which went from 1.4000 to 1.6000.

As traders we all work with the law of probability, and look to replicate what came before; this is a de ja vu moment it seems. All we now need is a fundamental spark to set the technicals rolling long.

There will be no issue with a weak dollar from the Federal Reserve; the strongest periods of economic growth in the U.S. have come from periods of Usd weakness. A lower value greenback aides the Trade Imbalance, assists in overseas investment flows, and in general sets up the next business cycle of expansion with a solid foundation to work from.

The oil and gold markets have already signaled that they are breaking the dollar stranglehold that has been in place for over twelve months. All that the commodity markets need are an equity arena that can hold support on the S&P futures at around 890.

If that happens, (a great big 'If') and we see tests of 925, 950, and 985 that hold stocks higher, the dollar index may be well on its way to test 72.00, from the current read of 80.00. That would equate to a move of around 10% on each of the major pairs.

If equities fail to move higher it seems that forex valuation will hold status quo, and spin their wheels waiting for the equity markets to signal risk tolerance, buyers to step in, and the dollar to re-value itself lower, just as the Fed want.

The variable in all of this is volume; market wide volume is very low, and as such, anything can happen, and usually will.