U.S. dollar – what next?

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The U.S. dollar has been on a tear during September as a deteriorating global economic outlook and debt concerns spooked investors. However, the greenback sharply reversed course since the beginning of the month. Where to from here? Chartist Arthur Hill of StockCharts.com provides a short review below.

The U.S. Dollar Index ($USD) was hit hard this week with a 2.2% decline. Weakness in the dollar buoyed oil and stocks, which have been negatively correlated with the greenback. Dollar weakness and euro strength is also associated with the risk-on trade. Despite this week’s decline, the bigger trend is still up and support is close at hand. The first chart shows weekly prices with a double bottom breakout when in September $USD broke resistance with a strong surge that was confirmed by RSI, which broke to its highest level in a year.

The second chart shows more details with a daily candlestick chart. There are three reasons to expect support soon. First, broken resistance in the 76 area turns into support. A “throwback” to broken resistance is not uncommon after a breakout. Second, a move to the 76 area would retrace 61.80% of the prior advance. Third, RSI moved into the 40-50 zone. This area acts as support during and uptrend.

Source: Arthur Hill, StockCharts Blogs, October 14, 2011.

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Reserve currency: Greenback’s share declines, but still largest player

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It is not a surprise the dollar continues to be the preferred official foreign exchange reserve currency, but the share shows a gradual decline in the past ten years. According to Asha Bangalore, vice president and economist of The Northern Trust  Company, the IMF’s Currency Composition of Official Foreign Exchange Reserves for the first and second quarter of 2011 places the greenback’s share at 60.6% of official foreign exchange reserves, down from a high of 71.5% in 2001.

“The euro’s role has grown from a share of 17.9% in 1999 (when the euro was introduced) to 26.5% in the first two quarters of 2011 (see Chart). It is largely a tussle between the dollar and the euro, for now. It is noteworthy that the share of ‘other currencies’ has risen threefold to 4.8% in the first-half of 20o11 vs. 1.6% in 1999. The IMF notes that details of this category are unknown,” said Bangalore.

Source: Asha Bangalore, Northern Trust – Daily Economic Commentary, September 30, 2011.

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Stay long the Swiss franc

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The Swiss franc has been in a strong uptrend since June last year, and rose in parabolic fashion during the first two weeks of August this year as safe haven concerns channelled massive flows into the Swissie. This has prompted the Swiss authorities to try to stop the franc from appreciating. Will they succeed? A research note from BCA Research casts some light on this question, as reported below.

“Last week, the Swiss National Bank (SNB) announced a further CHF40 billion liquidity measure and SNB Vice President Jordan said it would be legal to peg the Swiss franc to the euro. The view of our Foreign Exchange Strategy remains unchanged. Europe’s debt crisis is leading to heavy capital flows into the Swiss franc as a safe haven.

“The eurozone has a population of 330 million versus Switzerland’s 8 million. The influx of foreign money is simply overwhelming the tiny Swiss economy. Last year’s CHF115 billion expansion in the SNB’s balance sheet could not weaken the franc. The latest liquidity provisions may also fail.

“Paradoxically, stabilizing the franc versus the euro could cause greater instability in the Swiss economy. That was the lesson of the late 1970s. Unsterilized intervention led to an explosion in Swiss money supply, which fueled an inflationary boom. This was followed by an inevitable bust. The ‘cure’ may do more damage to the economy than the ‘disease’ of currency strength.”

The report concludes by advising investors to stay long the franc.

Source: BCA Research – Daily Insights Service, August 16, 2011.

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Euro’s reversal of fortune & outlook

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This post is a guest contribution by Dian Chu, market analyst, trader and author of the Economic Forecasts and Opinions blog.

The Euro closed up Friday`s session at 136.13, and looks poised to make a run up to test the 140 level in February. I, among many, was thinking the Euro would next test the 125 level, and things started heading well in that direction with the Euro moving down to 129, and appearing on a downward slope.

So what happened? Well, there have been quite a few new developments that prompted this reversal of the euro fortune.

PIIGS Bond Sale Surprise
First, Portugal and Spain had those long anticipated bond auctions, and they went well with a healthy dose of participation, and at lower than anticipated rates priced into the auctions. In other words, the bond vigilantes bid up expectations for a catastrophic auction, and the buyers stepped in and said thank you very much for these fabulous terms.

Furthermore, China and Japan had both publicly stated that they would be buyers of these risky European Country Bonds. So any shorts expecting a European collapse because of these much anticipated bond auctions failing miserably had to cover fast when the opposite occurred.

A Hawkish ECB
The second major turning point was Trichet who made some hawkish comments regarding inflation at his press conference after the ECB`s rate decision.  That really caught a bunch of shorts off guard, and sent the Euro up 2 full points in one day.

This really illustrated the difference between ECB and the U.S. Fed–ECB`s sole mandate being to ward off inflationary pressures, versus the FED`s dual mandates of monetary policy being governed by unemployment levels and inflation concerns.

… And A Dovish Fed
As such, the Fed will be able to begin raising the Fed Funds Rate in 2011 as the unemployment rate most likely will not be under 8%, which is the starting point for even considering rate hike according to Bernanke`s remarks on the subject.

If you listen to all the language coming out of the Fed minutes, they have always stated that rates are going to be left extraordinarily low for an extended period of time. This type of phrasing has left many analysts with the opinion that the unemployment level would have to get somewhere near the 6.5% levels before Bernanke would even consider raising rates.

With a major election coming up in 2012, the focus of the Obama administration and everybody else trying to get re-elected will be lowering the unemployment rate at all costs, even if we have to stomach a little inflation along the way.

So, about as hawkish as the Fed will be in 2011 towards inflation concerns is not initiating a QE3 campaign.  So it is quite logical that between the two central banks, ECB will most likely be the first to raise rates, and by far the more hawkish when it comes to monetary policy over the next two years.

Hot Money Flowing To Europe
The third major driver behind the resurgence of the Euro is an investment sea change by fund managers at the beginning of the year. In other words, where are the capital flows going in 2011?

After emerging markets had stellar returns in 2010 with the likes of Singapore and South Korea, it appears that the fund managers are moving some of their money into Europe with the belief that because of the over-hyped debt concerns of 2010, that European assets are currently undervalued and at a discount to emerging market assets.

Hot money coming into Europe is extremely bullish for the Euro.

Germany’s Really Kicking
The fourth factor affecting investor sentiment regarding the Euro are the strong economic reports coming out of Europe. At the forefront is Germany which is really firing on all cylinders, and looks strong enough to more than offset any budgetary shortfalls of the PIIGS, which actually make up a small percentage of the combined European GDP output.

Spain Cleaning The Banking House
The fifth reason the Euro bulls can point to is last week`s news that the Spanish government is shoring up some of the weakest banks with capital infusions which alleviates some of the concerns regarding Spain`s potential to be the next bond vigilante target.

This is the type of proactive governmental response that was lacking in 2010, which was always behind the curve, and only pushed into action by market forces. The fact that European leaders are learning their lesson and trying to get ahead of the bond vigilantes in 2011, which manifests itself in lower financing rates, is very encouraging and bullish for the Euro as well.

Euro United Bonds We Stand
Finally, there is the news that Germany is finally on board for supporting a unified European Bond, which would provide continuity, stability, and lower financing costs for the union as a whole (See Graph).  Financial Times reported that a multi-billion-euro bond was launched in early January to raise money for the Ireland bailout.  The triple-A rated bonds are expected to price at yields of about 2.5%, about 70 bps over German Bunds and well below those of Italian and Spanish debt.  Asian and Middle Eastern investors could buy about 30% of the paper.

Continue reading Euro’s reversal of fortune & outlook

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Richard Duncan on the “dollar crisis”

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In this video clip Richard Duncan, author of “The Dollar Crisis: Causes, Consequences, Cures” and “The Corruption Of Capitalism: A strategy to rebalance the global economy and restore sustainable growth”, suggests some concrete steps that he believes the U.S. must take in order to steady the ship and pave the way for future sustainable growth. He is in discussion with Mike Maloney, precious metals investment advisor.

[Parts 2 and 3 of the interview follow later.]

Source: YouTube, January 18, 2011 (hat tip: Gold & Silver).

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Stiglitz urges South Africa to take action to weaken rand

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Joseph Stiglitz, economics professor at Columbia University and a recipient of the Nobel Memorial Prize in Economic Sciences, has once again encouraged South Africa to take a more interventionist stance to weaken its exchange rate, saying that commodity-rich countries are correct to actively respond to the threat posed by over-valued currencies.

Source: CMTV (via YouTube), January 17, 2011 (hat tip: Financial Doom Blog).

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