By: Kevin Sollitt
So the EUR hit 1.50 again albeit at time of writing unconvincingly so, failing to make a new high by rejecting short-term technical resistance at around 1.5020. If this scenario holds, such price action may provide some clues to market positioning and sentiment, two of my favourite indicators. It’s almost as if the market did what it had to on an otherwise uneventful Monday morning to justify the weekend press of 10.2% unemployment in the U.S. and calls from the IMF that the U.S. Dollar may still be slightly overvalued. Some might say ‘so what’, as most people are likely aware of these factors already.
Admittedly, followers of the DXY indicator will no doubt agree that the USD could remain soft based on fundamentals (carry trade) and technically, with its current level at around 75 leaving room for a further downside to the 69 region. This is based on the theory that the DXY being comprised of around 60 percent EUR and the EUR itself trading at about 7 percent below its high against the USD.
The IMF, though, is not seen as the clarion voice it once was. Some schools of thought may argue against the credibility of an organization that may not uphold its own rules, (Article 4 of the IMF Articles of Agreement requires that countries avoid manipulating exchange rates). In this 21st century global trading environment, how can any currency remain fixed-are some Asian currencies slightly undervalued and if so what are the implications for the USD.
Sure, America imports too much but were the playing surface to become level perhaps the exports would pick-up and the trade balance thus improve, helping the USD. So while it’s fair to day that the USD may be slightly overvalued today, what about tomorrow and the day after, etc?
Well we already know that the ECB are unhappy with EUR at 1.50 and interestingly enough the Monetary Authority of Singapore were said to have intervened in the spot USD/SGD market yesterday when the pair traded to 1.3850.
Although perhaps at early stages, by adding up such little pieces of information may provide potential for a ‘surprise’ move in the USD towards year-end, the surprise of course being upwards.
This theory is sketchy based on present evidence and admittedly counterintuitive to present known fundamentals. However the idea of a USD recovery is also based on market positioning-and what could happen domestically in the U.S.
The market is definitely very short of USD but may not be looking outside the box to protect these positions.
The Fed has never hiked until the unemployment rate has peaked and now that we have had a new high in the rate the probability of a peak being close is surely higher, especially based on weekly jobless claims falling. Of course we are not talking miraculous amounts of job creation here but what would certainly not be a surprise is to see the market caught wrong-footed by the threat or actuality of currency intervention of some kind, if the G-20 get their respective acts together to address certain imbalances.
What if the US were to declare some kind of tax break for companies with overseas operations, much like it did with the American Jobs Creation Act of 2004, which opened the door for companies to bring back profits made & held overseas, ultimately allowing the government to increase tax receipts?
Market-wise, what may also be interesting is that the dollar-bloc currencies, which led the charge against the USD, show no convincing signs of breaking their previous highs. Could be a very interesting few weeks ahead and reversals in Q4 are generally vicious moves. Good trading.