FX Trading - Good On the Dollar

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Key News

  •  U.K. November Retail Sales Unexpectedly Fall 0.3% in First Drop Since May (Bloomberg)
  •  Greenspan Says S&P 500 Rally Cuts Stimulus Needs as Household Wealth Rises (Bloomberg)
  •  Oil and inflation (Financial Times)
  •  Greece - A Line in the Sand? (Naked Capitalism) Editor's note: another's quick perspective to complement what we've been saying regarding the risks building up behind the Greece debt fiasco.
  •  Time magazine names Bernanke Person of the Year‎ (Reuters) Editor's note: Very few persons received as much attention this year as Benny B, though I'm surprised Michael Jackson wasn't in the running. I suppose we can feel good that Ben was able to edge out House Speaker Nancy Pelosi.

Quotable

Rise, brothers, rise; the wakening skies pray to the morning light,
The wind lies asleep in the arms of the dawn like a child that has cried all night.
Come, let us gather our nets from the shore and set our catamarans free,
To capture the leaping wealth of the tide, for we are the kings of the sea!

No longer delay, let us hasten away in the track of the sea gull's call,
The sea is our mother, the cloud is our brother, the waves are our comrades all.
What though we toss at the fall of the sun where the hand of the sea-god drives?
He who holds the storm by the hair, will hide in his breast our lives.

Sweet is the shade of the cocoanut glade, and the scent of the mango grove,
And sweet are the sands at the full o' the moon with the sound of the voices we love;
But sweeter, O brothers, the kiss of the spray and the dance of the wild foam's glee;
Row, brothers, row to the edge of the verge, where the low sky mates with the sea.

                                   Sarojini Naidu, The Coromandel Fishers

 

FX Trading - Good On the Dollar

Well, this is something we haven't exactly seen in a while. The US dollar is making good on positive fundamental developments; granted it's being helped along a bit by ongoing worries in Greece.

In case you missed it, another credit rating downgrade of Greece has pressured its bonds, the spread between 10-year Greece and German government bonds has widen to 269 basis points. We haven't seen anything that wide since April ... and the record during the euro's existence sits a tad bit north of 300 basis points.

But back to the buck ... I was a bit surprised yesterday when the buck reacted well to the FOMC rhetoric. I figured the Fed would do as it normally does and try its hardest not to say anything that would spook equity markets. Though I expected traders who'd bid up the dollar on the sooner-than-later interest rate expectations would come away disappointed. Instead they keyed on the slight change in wording which revealed an optimistic tone on the recovery potential for the US ... and they didn't go running from the buck.

So instead of wiping away some of its recent gains, the dollar stood strong and hasn't looked back ... as all the majors save the Japanese yen are down more than 1% so far today. This rates a look at the weekly chart of the US dollar so we can get a better understanding of the magnitude of this move:

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Last week is when this index broke above its downtrend; this week its confirming that move. While it's overcome nearer-term resistance this week, there is an area of price congestion - several points of previous support and resistance - just above 78 that could slow this move down somewhat. Something to keep an eye on anyway.

Perhaps more important though, can investors really believe in the US dollar? As with so many countries, especially in Europe, the US needs to get its fiscal house in order. The US consumer likely needs to make some sort of comeback, perhaps not a return to pre-crisis mentality but at least stabilizing at a level that spurs economic activity in the US. And that's likely not going to happen until jobs take a decisive turn upward. The latest NFP was a good step, but its only one step. And not to mention, we'd have to see the consensus get over the stigma around the Fed keeping rates abnormally low for so long and the potential for that to create inflation and wreck the dollar.

But for now traders and investors might actually want to believe (and that will help), though it's going to take a lot more for sentiment to shift for the long-term.

And as long as traders and investors are losing confidence in the Eurozone's ability to keep it together, it will buy some time for the US to keep rebuilding. A long-term dollar bottom is something that will likely gain some credibility as the year winds to a close.

But for those who are not ready just yet to throw in the towel and go long the dollar, you can take solace in the fact that maybe this move is just a much needed correction. Maybe it's just a reprieve after several calls by global central banks that rising currencies are putting their respective recovery at risk. Maybe this is just a year-end book-squaring thing that's driving asset markets, especially the dollar.

But maybe not - US stocks are holding up at the same time that the dollar is making its strides. That's not typical of risk appetite capital flows. A look at a chart of the Shanghai SE Composite index and the S&P 500 index might confirm this is a US-centric story:

China shares rolling over?

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Last time a change in correlation between crude oil and the US dollar foreshadowed a massive dollar rally. Should we take note of this change of correlation between US stocks and the dollar?

Why not, right?

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