Friday showed very well the market’s perception of the value of long-dollar positions, some that were built as a ‘flight to safety’ in reaction to equity markets imploding, as the credit crisis unfolded. After seeing the moves through all of last week it seems that the dollar index will now struggle to regain the ground it lost, and struggle to easily get above 85.00. It may not be all downhill, but the technical signals have been building as a reflection of the mass of fundamental news that have been absorbed recently.
Very little of that news has been Usd, (dollar, not American), positive, and that is just the way the Fed and the administration would have wanted it to be. The greatest expansionary times in U.S. business cycles have come off the back of weak dollar values, and now may be the time that the greenback re-traces and finds support between 72.00 and 75.00 on the dollar index.
It may not be that any region is better placed than the U.S. right now, but no other region supports the currency that values global commodities, supports the largest equity markets, and backs the biggest bond market. For that reason the dollar may lose value for a while whilst the expansion phases of global business cycles get grounded.
From a weaker dollar period the U.S. can more easily start the growth cycle in 2010, with 0.25% interest rate increases that get 2012 overnight rates up towards 4%, and get the dollar back up towards current valuations.
The late move by the majors on Friday caught us off-guard a little because of the timing; we were looking to wrap up a week of historic proportions in regard to interest rate differentials, debt/reserve ratios, trust in the newly formed financial arena, valuations of Treasury debt, Note/Yield movements. The fact that the forex move was not backed by a subsequent equity market break of the same proportions speaks volumes.
We did not expect such a strong finish from the majors to come once oil closed at the high if the day, without equity markets backing it. For months the late Friday session has offered very little, and U.S. afternoon sessions have in general been nothing more than boring and tedious to monitor. This move really grabs attention and asks the question of how easily things will hold the Sunday gap.
We have taken a lot from the signal on Friday afternoon when major pairs moved en-block against the dollar; it confirms our thought process that we have been building and posting regarding the next phase of dollar values. We have been calling attention to the upcoming major swing change on the Usd, and Friday revealed how easily it was for jpy and chf to get things rolling; that is a strong sign that the mood has changed from ‘flight to safety’ to acceptance of risk in forex valuations.
While equity markets hold support, oil moves to test $65, and Treasury note values drop, the moves from Friday will continue to build; none of those things happening will allow the dollar to get stronger. It may not collapse, but fair value on the buck just took a hit that may just hold more easily than at any time in the last twelve months.