Dollar Rides High

Marc To Market's picture

Fundamental and technical considerations are aligned in favor of the US dollar.  The latest string of economic data, including the June employment report, is strengthening the market's conviction that the Federal Reserve will begin tapering its long-term asset purchases later this year and raise the Fed funds target by the end of next year.  

At the same time, the other major central banks are moving in the opposite direction.  The Bank of England issued a mild protest to the rise in UK rates.  The ECB more explicitly pre-committed to low rates for an extended period.  The Bank of Japan is only a few months into its QE, and while deflation is indeed being arrested, the 2% inflation target is remains a long distance off.  

The incentives for unwinding the structural short-dollar trade remains intact.  Emerging markets were among the major beneficiaries of the trade and remain vulnerable to the reversal.   Thinner currencies, even among the majors, like the Swedish krona and Norwegian krone, are also typically vulnerable to such position adjusting as well.  

The Dollar Index made new three year highs before the weekend and after the employment data.  Although it is flirting with the top of its Bollinger Band, there is no compelling sign that the move is exhausted.  It has rallied over 5% off the low on June 19, when it recorded a key upside reversal.  Our next target is the downtrend line drawn off 2009 and 2010 highs and comes in near 86.00.   

The euro has taken out the trend line objective we have been highlighting that came in near $1.2850. That area, and perhaps extending toward $1.2900 may offer fresh selling opportunities on corrective upticks.   Our next target is the $1.2680-$1.2750 area.  The euro-dollar exchange rate continues to track the US-German 2-year rate differential.  That spread has widened sharply from about 8 bp on June 20 to nearly 29 bp before the weekend, a new high for the year.  

The dollar looks poised to advance further against the yen in the near-term.  We look for JPY102.50 on its way to retest the recent high near JPY103.75.  We envision buyers on dips to emerge near par.  For this pair we find the 10-year interest rate differential more useful.   The US offered 105 bp more than Japan in late May and this increased by roughly 50 bp in response Bernanke's comments in late June and another 30 bp since; finishing last week at 186 bp, a two-year high.  

Sterling shed about 4.5 cents in the last two sessions on a combination 1-2 punch from the BOE's Carney and the better US jobs data.   The year's low, set in mid-March near $1.4830, may not offer much support.  We expect sterling to continue to work its way lower and there seems to be little in the way of substantive technical support until closer to $1.45, which will bring the post-Lehman $1.4230 low into view.  

The Swiss franc's correlation with the euro has lessened and its correlation with the yen has increased (60-day percent change basis).  This may be an important and early insight in the evolution of funding currencies. The franc and yen may replace the dollar for some participants in some market segments.  Technically, our next objective is near CHF0.9800-CHF0.9840 for the dollar.  Support is likely found ahead of CHF0.9530.

This environment is not good for the dollar-bloc, which had been the market's darlings for much of the post-Lehman period.  Both the Canadian and Australian dollar recorded new lows for the year last week and the adjustment is not over.  The next technical target for the Australian dollar is in the $0.8980-$0.9000 area.  The next target for the US dollar is in the CAD1.0660-80 area that corresponds to the highs from 2011 and H2 2010.  For the Aussie, corrective upticks will likely be limited now to the $0.9180-$0.9200 band, while US dollar slippage to CAD1.05 will likely be bought.  

The dollar did fall toward our secondary target near MXN12.80 before the US employment report.  The sharp sell-off in US Treasuries proved too much for the peso and Mexican bonds and equities.  Here the market positioning and technical story overwhelm the constructive fundamental picture.   The near-term risk extends toward MXN13.15 and MXN13.22.  The price action reinforces the significance of the MXN12.80 support area for the US dollar.    

We note that on occasion some observers will try to spin the peso as a petro-currency, and with the rise in oil prices (14-month high before the weekend), it may be cited.  Our work shows that the correlation between the peso and front month crude oil futures contract on both a 30- and 60-day rolling basis, among the lowest of thus far this year (0.20 and 0.26 respectively).   

Due to the holiday, the CFTC Commitment of Traders report of speculative positioning in the futures market has been delaye

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DizzySailor's picture

My gold has been stloen In Easton Maryland  Registered mail RA353455157US Sent to APMEX, yours could be next


Rob Jones's picture

Never ship gold using USPS. They will not pay insurance claims unless they flat-out lose the package. But if a dishonest employee opens the package, removes the contents, and sends it on its way you will not get paid. You will fill out the claim forms, after several months the USPS will open an "investigation", conclude that there is no proof that anything was stolen, and deny the claim. All the insurance does is to alert a dishonest postal employee that the package contains a high-value item.

If your entire package just disappeared, you may be lucky. In that case, your claim might have a chance of being paid.

FreedomGuy's picture

I have a question for professional traders: If the dollar is strengthening and there is more demand, shouldn't bond prices being rising (yields falling)?

garypaul's picture

I'm no pro either, but if people sell longer-duration bonds (eg 10 or 20 years), and then they buy short term bills (eg 90 days) because there's nowhere else to put the money, that would cause the US dollar to strengthen (due to bill-buying) even as the interest yield rises on the 10-year (since it's closer to the duration that they are selling).

OneTinSoldier66's picture

I'm not a professional trader but I'll take a stab at this. But I won't answer it really. Instead I'll "answer" it with more questions. :-)


Perhaps they should be. But who has been one of the largest purchasers of bonds for some time now in order to "support" the bond market? What happens when the entity that has been giving support to the bond market is no longer able to support it even it if wishes it could, because the effects of it's "support mechanism" no longer works like it used to?


More directly, what happens if Ben Bernanke is losing control of the interest rate in the bond market? Ben Bernanke's holy grail is to keep interest rates down, and he recently stated that he found it, "curious", that rates were rising in face of his bond purchases. Now, why wouldn't printing money up out of thin air work forever? I don't know. Maybe you can tell me!

billwilson's picture

Canadian dollar .... no money printing, reasonable deficits (versus US)  .. goes down versus US.  Interesting, but not very fundamentally based.

steelrules's picture

Canadian Gov. dumps CDN $ into the market and buys US $ to keep Canadian exports cheap & economy going, this is political.

Politicians can stand up on the tube and tell Canadians that their "Jobs Programs" are working, most Canadians don't understand that this is inflating away their savings and their buying power.

FreedomGuy's picture

Currency values, like most things are a herd phenomenon. They are not always rational.

toadold's picture

The currency war is starting to look like a game of musical chairs combined with whack'a mole.

"OK, lets devalue are currency so we can export more stuff.  What's that you say Lassie? We are dependent on strategic material imports to keep our economy running and our factories are already moving overseas to get fuel and material?

Little Timmy has a talking dog but never listens to him. 

pachanguero's picture

DXY looks strong. Buy gold all the way dowm

Quinvarius's picture

The dollar is not allowed to stay over 84.  There is no currency market.  There are Central Bank enforced exchange rates.  The dollar is right where it was 8 years ago. It will stay in the trading range it has been placed in.  It is just a number on a screen.  Right now the number is too high for trade.

ISEEIT's picture

I'll agree with you on the point of controlled (BIS) ranges. Adjustments are made though. The USD has not been allowed to remain over 84. I'm inclined to believe that a new set of ranges is being/has been established. The China story plays into it in a huge way and Japan is f'ed anyway you slice it, however both the YEN and the EUR must settle lower relative to the USD for immediate survival. This is all about the globalist project and a strong USD right now simply makes more sense in that although the US is a complete basket case, we do still maintain the ability to absorb quite a bit more shock than Japan or Europe (as in E.U.). The USD does I believe remain the worlds primary Reserve currency by quite a wide margin (the TP of last resort?) and represents 'real' money for quite a large percentage of the world's population.

Have a look at this guy's thoughts? I was very skeptical when I first considered his thinking but as time has moved forward the flow of reality seems to be supporting his reasoning quite flatteringly.

May or may not be the exact article I have in mind...? But generally supportive of what I believe we're seeing.

Quinvarius's picture

Possibly.  But I think they have white knuckled death grip on the trading ranges based on the sheer terror of global devaluations.  They are too scared to let any trend develop anywhere.  They have no idea what might happen if anything gets out of line, up or down.

IMO, their misguided attack on gold derivative pricing was probably a mistake for similar reasons, but made worse by the increase in physical demand.  They don't know how important that gold price was to global stability.  There is no way of knowing what they unleashed by attacking an entire asset class the world uses for savings, collateral, and money. 

I think they are just trying to paint a picture of what they think stability is.  But, they have no idea what stability is, and they are using a butcherknife instead a paintbrush, on their own stomaches instead of on a canvas.  


ISEEIT's picture

Pretty much. Bear in mind though that hardly anyone is watching what they actually do. What seems astonishing to YOU is astonishing. You and the other couple people standing there saying "WTF?" But thats not many people. Not enough to establish an agreed upon reality. Fake works with enough 'buy-in', at least for a while.

What we see unfolding in damn near real time has a serious 'lag' effect in the 'real' world. The truth is most in this construct really only want to play ball with whatever happens to be working at the moment (faking it)...

Handful of Dust's picture

Heavy equipment companies that export (like CAT) must be squirming. The strong dollar has to hurt.


On the other hand, you can buy real 'necessities' imported textiles from Bangladesh or China--- like your 99th sweater or 324th pair of socks-- Cheaper then Dirt.


Too bad cost of food, health insurance, energy, and airfare continue to soar. Don't forget college tuition.

Bear's picture

Just counted:

56 collared shirts

25 slacks

10 jeans

15 pairs of shoes


WTF ... Where did they all come from?

ISEEIT's picture

College tuition is 'free' didn't ya know? Honestly I know a kid who can't give me a straight answer as far as what he might 'owe'. He's 22 years old and has been living off 'loans' for the last three years. He even actually went to a school for a bit (to become a commercial diver). Poor guy would go classes to for a time but then daddy obie would send him another check and it was off to the races.. (meth, but the booze didn't really seem to help either)

The gummit is real nice though. You just apply again and bingo moe money!

DeadFred's picture

Don't expect meth and straight answers to ever coexist.