Posts Tagged ‘inflation’

Dollar weakness persists

Monday, June 1st, 2009

As mentioned in my previous post about the dollar, the current financial theme in the Forex market is dollar weakness.

As most bad economic news have already been priced into financial markets, and as these markets were created to anticipate, or speculate depending on whom you ask, the bullish market is continuing full steam at the start of June. The Dow Jones is up 211.11 points today.

The idea is that with so much Government intervention and liquidity creation by Central Banks globally, low interest rates and asset prices at much more affordable levels than they used to be, all is set for the next bull market.

This is not exactly a new bull market, but rather a current bull market as it started nearly three months ago. Only time will tell how powerful this rally is, but for now the bulls are dictating the direction of financial markets, with many new 6 months highs or lows reached today.

Rallying stock and bond markets, lower rates and liquidity injections make the dollar less attractive as an asset and this is the reason why a corollary of the current financial paradigm is dollar weakness.

Today’s rally was fueled by numbers showing that the US manufacturing sector was contracting at the lowest pace in recent history in addition to indications that commodity demand was strong in Asia.

The euro broke 1.42 in European time, to settle later around 141.60. The dollar was weak across the board and reached new 6 months intraday lows against most other currencies.

Based on the momentum theory, I forecast further dollar weakness in the near term.

Euro at a 2009 High on Dollar

Saturday, May 23rd, 2009

Since the end of 2008, the Euro has traded in a range 1.25-1.40, moving back and forth.

In the pas few weeks, the Euro has rallied steadily and crossed 1.40 for the first time in 2009. What is also apparent is the correlation with the rally of the U.S. stock market.

The U.S. market has been rallying smoothly (with lower volatility) as of late, and for now momentum players are ruling the Euro. This is a standard type of trade with a mini trend started from a strong low (as the recent low is stronger than previous lows), plus the possibility to test a 6-month and a 9-month ranges, and to go all the way to the next magnet price of 1.50.

With respect to fundamental news, one reason for the rally is the recent decision by Standard & Poor’s to take a negative outlook on the triple-A rating of the U.K. This led to the belief that the triple-A rating of the U.S.A. could or should also be put on the same watch list.

Between you and me, this is ludicrous, as there is no better credit in the World than the U.S. Government. This is why it is called risk-free rate in Economics and Finance classes. Downgrading such rating is totally meaningless, as it just means all other credits should be shifted down as well. So this sounds more like an excuse to justify the rally than anything else, and confirms the momentum play theory.

In the other main currency pair, the Yen has also being very strong lately, confirming the scenario of overall medium-term U.S. dollar weakness, even though it corrected by late Friday. The dollar has also been weak versus the British Pound and the Swiss franc.

How is this dollar weakness playing in the bigger picture? For many months, part of the financial and forex business community has been concerned with the massive influx of liquidity created by World Central Banks, especially the Federal Reserve.

Printing money in times of crisis is not a new medicine, but the Obama’s administration is using it like there is no tomorrow. Creating money has always led to inflation since the first King of Antiquity started it. Only the future will tell us if this time is a different time. Or if this time there are strong enough counter forces such as a globalization induced deflationary wave to eradicate this mounting inflation.

For now, most economic indicators show inflation insouciance, such as the spread between the yield on the 10-year inflation-protected Treasury and the regular 10-year Treasury, which suggests inflation at 1.78%. But a number of smart money and well informed investors have been piling into Gold this year, betting that inflation will pop its ugly head at some point.