Dollar Sobers Up Despite Fed PunchBowl

by Ashraf Laidi
Dec 18, 2009 18:24 | 80 Comments

The US dollar builds on its newly acquired robustness amid the FOMCs modest economic upgrade with regards to labour markets and the reiteration of the Feb 1st 2010 deadline as the expiry for the various liquidity operations. Although the FOMC statement maintained the phrase exceptionally low levels of the federal funds rate for an extended period, the overall tone was more than sufficient for the greenback to extend its upward trajectory, especially amid the rapid concentration of Eurozone-centric credit and banking problems cast a pall on the non-USD block.

Considering that the balance of recent US data has tipped in favour of the US (employment, retail sales and CPI), dollar bulls will content themselves with the slightest of modest of hawkish/ commentary from the Fed. Wednesdays FOMC statement was a simple step in the Feds challenging task of normalizing liquidity and credit markets amid an environment of rising yields and consolidating equities.

The combination of negative event flow in the Eurozone, year-end window dressing operations reducing USD shorts and a USD-favourable yield gap will prolong USD gains into mid Q1 2010, especially amid no prospects of a fast resolution in the Eurozone sovereign problems. Consequently, EURUSD hit the $1.4280 target issued at the Dec 10 HotChart after the pair exceeded the magnitude of its 2 prior down cycles. $1.41 should likely emerge as the next support level, but $1.38 appears to be a sturdier foundation.

USDJPY Eyes 93

It is time for JPY to take a temporary a break and allow the USD to draw most of the risk aversion plays at the next round of risk pullback. Two weeks after the Bank of Japan was pressured by the MoF to inject extra liquidity aimed at stabilizing yen strength, the central bank today altered its definition of price stability to include only positive price growth, instead of the previous definition of zero-2% annual growth. By announcing its intolerance for flat consumer price prices, the BoJ is set push against a resurgence in yen strength.

Dollar Sobers Up Despite Fed PunchBowl - Jpymonthlydec18 (Chart 1)

Accordingly, we would expect USDJPY to regain 92.50 until it encounters the next resistance at the 2 year trend line on the monthly chart below. Subsequent pressure point emerges at 95 before we could see a gradual turn in the pair near February. Were not yet abandoning our 5-year approach on the cyclical lows in USDJPY and so it is too early to call the bottom of USDJPY.

Sterling to Regain Whipping Boy Status in 2010

Just as liquidity withdrawal may become the buzzword of 2010, the UK economy and its currency could fall victim to an excessive reduction in stimulus. The Bank of England has already signalled its intentions to not add any more quantitative easing, the UK Treasury plans spending cuts, the VAT hike is levied in January, the scrappage incentives for used cars expires in February and the May General Elections promise to be a close race.

None of these developments are set to favour GBP or the UK economy which has yet to recover from recession. Sterling risks regaining its status as the whipping boy of FX in 2010 as these vital dosages of oxygen are removed from a still tepid economy. The 200-day MA of $1.60 is the next target for the bears over the short term, while $1.55 is seen as the next medium term average for GBPUSD after the $1.70 figure continues to hold above the monthly closes since October 2008.

Dollar Sobers Up Despite Fed PunchBowl - Gbpmonthlydec18 (Chart 2)

Comments (Showing latest 10 of 80) View All Comments
rim
Turkey
Posts: 121
10 years ago
Jan 12, 2010 14:44
Dear Ashraf ,

Chinese tightening policy , Canadian and US trade deficit and Venezualian devaluation how will

effect DXY ?
Davidau35
Hong Kong
Posted Anonymously
10 years ago
Jan 4, 2010 16:27
Bernanke is actually very worrying about the upcoming Hyperinflation deep down
BUT he "talked Deflation" to make sure all you fools sleep with your
hyperinflated worthless cash......
Davidau35
Hong Kong
Posted Anonymously
10 years ago
Jan 4, 2010 16:09
Rubbish USD Index Rebound Bubble has bursted badly! Only fools rushed in to buy last month!! These fools will pay a high price!!!
Rob
New York, United States
Posts: 305
10 years ago
Jan 4, 2010 1:09
Wishing Ashraf and all the members of the forum a Happy, Healthy, and Wealthy 2010 and beyond!!!
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Dec 28, 2009 23:45
Dan, id say around 7.45. The path will be interesting to see.

Ashraf
Dan
New York, United States
Posted Anonymously
10 years ago
Dec 28, 2009 23:16
Ashraf, what's your end of Q1 forecast for USD/SEK? Thanks as always.
Ashraf Laidi
London, UK
Posts: 0
10 years ago
Dec 28, 2009 5:21
abz see today's IMT

piper, it depends what kind of $$ we're talking about and what % of risk capital is involved.

Dan, more like stabilization of USD and NOT outight and broad sterngth. And these gains will vary against currencies.

Ashraf
Dan
New York, United States
Posted Anonymously
10 years ago
Dec 28, 2009 4:57
Ashraf, I gather you are of the view that USD generally is going to strengthen against other G10 currencies in H1. Is that right? Thanks.
said
mulhouse, France
Posts: 2822
10 years ago
Dec 27, 2009 23:41
eh forum
eh ashraf
is anybody there? still digesting the feast table?

within the trading day yen probably back at 91.15
asad
London, UK
Posted Anonymously
10 years ago
Dec 25, 2009 23:18
Evan,

I somewhat agree w/ your premiss. But whatever way you take fundamentals, they're subjective compared to technicals.

Say, if 68.50 is supposed to be the support level for oil, you, I, Ashraf and Goldman alike would know this key level...& how to react here. However, earlier this month, when Iran declared that it's building eleven (?) new nuclear facilities, there was confusion as to whether the event was important enough to turn into a standout...& influence oil prices. Your, my, Ashraf's and Goldman's judgement would have varied wrt buying oil. (The price increased over a dollar after a while of the news item release...probably because the market wanted someone to take the lead)

But yes, once break-outs occur, it's herd effect thereon. Your tulip and housing examples are apt. Again, because technicals are available to all & sundry...it's the fundamental information (& the interpretation of it) that makes the real difference!

Finally, fundamentals can throw all technicals out of the window in a flash. Imagine you woke up tomorrow w/ Greece declaring bankruptcy...or Israel attacking Iran's nuclear facilities...


Asad