2009-04-14

Dollar in Doldrums?

DXM9 (US Dollar Index) on ICE/NYBOT

SELL up to 85.75 STOP 86.75 TGT 79.54 - 71.43 (extreme)

Recently I wrote about unusual movement in British Pound where I discussed that British Pound looks heading upwards against USD. Subsequent analysis of USD chart points that USD looks to be heading down against other major currencies (hence the weakness in USD Index). Now this creates interesting situation if USD does appear to be weakening. Back in Sep 2008 I wrote a piece about tendency of world market participants to run to dollar in case of extreme panic or euphoria (the so called dollar smile). Dollar is generally weak in other scenarios where investors look for better returns in riskier areas be it Russian real estate OR Australian copper mines. For most of the bear market of 2008-09 USD has been strong, even if US national debt has been clocking higher every second. And even though there have been some noises in the echelons of power about hegemony of US govt to be in position to control the value of world reserves given that USD is still recognised as world reserve currency. When China sells to Argentina, they do not exchange Peso to Yuan. It goes from Peso to Dollar which Chinese govt reluctantly uses to buy US treasuries to keep as its foreign exchange reserve. However in the new world era, it appears that longer term direction is set to remove USD as world reserve currency. It will not happen overnight, it will definitely not happen in a year but baby steps will be taken to make it happen in my lifetime unless I start playing roulette in Russian casinos. So a very long term direction for USD is down.

 

The confusing scenario or fly in the ointment for USD weakness is the question about recovery in world markets/economies. Even though most markets have rallied strongly since March lows, the economy still appears to be in danger of slowdown. Credit markets and corporate bonds are still pricing in dooms day scenario and even though some bond markets have improved to price in a recession instead of depression, the threat of depression has not gone away and my analysis of bond markets does indicated a lot of pent up energy which can provide a wild swing up in long term bond prices (i.e. a Japan kind of recovery instead of V or U shape everyone tends to talk about).

 

As always, the fundamental reasons will start appearing soon once the charts have started showing direction. This move appears to be in making so if it panes out as planned, this can be a long term ride. One to watch!

2009-04-07

British Pound has something going on!

BP/6BM9 Globex or GBPUSD

Buy up to 1.4450 Stop 1.4100 Target 1.5850 - 1.7320

British Pound was turning out to be the worst currency (and worst economy) in the developed world. The deficits are comparable to Hungary which had to go out cap in hand to IMF and there were intense speculations as if the same fate would be met by British economy as well in not so distant future. So I was bit surprised to see that BP chart has started showing quite a lot of strentgh lately. OK, some part of that run up is due to general Dollar weakness but BP has performed strongly against EUR and YEN as well and also other currencies. Could it be return of carry trade? Dont think so. GBP barely offers any decent interest rates compared to YEN and unlike AUD/ZAR - we do not produce much commodities so it could not be inflation and run up in basic metals story. So what is GBP charts saying which is not yet out in news? Short covering - may be and in which case the rally will die after some chop around without significant breakout from current levels. 

One reason could be that may be just may be Bank of England will start putting breaks on the quantitative easing and interst rate cuts (not much to cut anyway). Inflation in UK has remained stubbornly high and any sign that BOE is getting concerned about the inflation may squeeze GBP shorts for some time. Also signs of recovery in world economy would depress dollar and unlike EUR, GBP does not have to bother about Eastern Europe problems. So whatever are the reasons, it would come out soon. As of now the chart looks bullish and worth a punt on GBP long for sometime.