FOMC And The Dollar. Devaluation Is The Goal

 @ibtimes on July 15 2009 12:23 PM

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Trade Desk Thoughts: 

The European session is coming to a close, and is creating the final momentum push that is very likely to tempt some traders in, under the 'Fear of Potential Loss' syndrome. But, take care, do not over commit to it, because it is not likely to hold for too much more appreciation. Take a look at how many times we see pivot point two areas get hit, let alone traded through and held. Now see if there are many days that pivot point three is even hit; it is a tiny percentage of times, and every one results in a reversal to support before the major moves get going. The ebbs and flows are creating the potential for a big break, and doing it in small steps that will build momentum. This is only the beginning of what could be a big break.

Therefore, take care opening any ticket right now, because ahead of the FOMC Minutes at 14:00 EDT, we are more likely to see a pull-back than we are an extended break-out. On Jul 13 09, at 04:00 EDT most major currencies registered an Overbought momentum read on the Usd, and all of them have since held that read. That kind of reaction is expected in a trending market of higher highs, and lower lows. But, in the side-winder of a market that we have seen since May 21 09 it signals one thing; a massive swing change is trying to form. It may be that the top of the 4 hour ranges will be hit, and things will reverse; but there is enough room to move higher on these major pairs. However, making the next break ahead of the FOMC Minutes is unlikely, although not impossible.

There is nothing that we can see that the Fed can say today, in the form of this statement that will not feed the short-dollar bias that has been building. The bottom line is that those on the inside know full well that talk about a 'Strong dollar policy' is nothing other than jawboning a currency that needs to be seen as robust because of the debt-to-growth imbalance that the economy backing it has. That is not a policy that will enable an economic recovery; the strongest periods of economic growth in the U.S., the global consumption leader, have all come after sustained periods of Usd weakness, high unemployment, and low interest rates.

This time is no different, and now that we have seen the follow through from the central bank driven break that took the market by storm at the 02:00 EDT open of the German Dax futures market, we are more convinced than ever that this is a challenge to the dollar index that the market will be hard pressed to ignore.

Momentum, Price Action, and Sentiment, are backing it. All that is needed is a reversal to support that will fuel the fire, and make the subsequent break-outs easier to hold. Equity markets are backing the moves, as are gold bugs, but oil speculators are not as yet buying into it, and that is a main reason why the much needed intra-day pull-back may more easily happen, than not.

There is  a tidal wave of Mutual Fund cash that seemed to have missed the boat on the March equity break-out, and since may have been waiting for the 927 test on the S&P. Well, it is here, it is now, and there are only just over three months for Mutual Funds to wrap their October 31st year end up. If that wall of cash starts to hit, the momentum will build against the dollar. Whether equity P/E's are hot, cold, or just right, is irrelevant at the moment; this is a momentum break in a market that has been starved of order flows for seven weeks, and that in itself may be a piece of a puzzle that creates a long equity, short dollar rally, of sorts.

Be it right or wrong, this is an opinion-free rally that is moving on price action and sentiment. Long live the pull-back; shake out the weak hands, allow the main swath to jump on, and pick up the stragglers as we go through these areas again, with a fresh momentum.

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