The Dollar Has Bottomed
As hard as you may find it to believe, it looks like the weak Dollar trend has bottomed and that the Dollar is poised to make some recovery. The currency most likely to suffer the largest loss against the Dollar is the Pound. The Euro should lose some value as well and certainly, without a major change in the present circumstances, the Euro will not be heading towards new records.
Since I'm known basically as a fundamental trader, let me set the record straight. I'm a fusion trader, as in, I trade a fusion of fundamentals and technicals. I don't believe either works very well without the other because fundamentals help provide the overall direction while technicals help provide price entries.
I'm sure the vast majority of readers are well versed in the basic picture. Suffice to say that a U.S. housing recession, weak job market, falling consumer confidence and rising commodity inflation are posing a serious threat not just for the U.S but for the U.K. and for Europe as well.
As with many instances in life, sometimes what's not said speaks louder than what is. In this case, what's not happening is speaking louder than what is, at least to me.
Have you noticed that with all the weak U.S. data (and absolute lack of positive data) the Dollar has stopped depreciating? That fact is screaming, as far as I can hear.
Yes, there are some good reasons for this. For one thing, the Fed is basically done lowering interest rates in this cycle though some feel the Fed is merely paying lip service to the inflation threat. For me, rate reductions ended the day Martin Feldstein opened in the WSJ that the Fed had gone far enough.
We can see this plainly in Fed Funds Implied Probabilities which are (post Tuesday's housing data) still pricing in a 35% chance for an increase in October and a 28% chance for one in September. No, it doesn't mean the Fed will raise rates then, but it certainly means the market is now telling the Fed it neither expects, nor wants, another rate reduction.
Even more importantly, through circumstance (or even design if you wish), the Fed got to do something that the BoE and ECB will very likely not have the opportunity of doing, at least in the foreseeable future. This is crucial, because it leaves the Fed in a totally different position than the other central banks.
The Fed had the chance to lower interest rates before the commodity inflation set in, bringing real, effective interest rates near or even below zero. Essentially, the Fed's target rate is below the rate of inflation while BoE and ECB target rates are above. And even though this is not being played out in the current market conditions, that's an enormous advantage for the U.S. economy that is going to be taking hold.
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