Reply #38: dollar watch

[UpInArms]

http://quotes.ino.com/chart/?s=NYBOT_DX&v=i

Last trade 87.435 Change +0.052 (+0.07%)

Dollar Honeymoon

http://www.bktraderfx.com/site/fx-weekly-reports/fx-weekly-021309-022009-dollar-honeymoon-over

When I used to be a headhunter during the Internet bubble days of the 1990’s, I had colleague from the deep south with whom I would chat at least once a week. We couldn’t have been more different in outlook and temperament but we got along well and always enjoyed each others company. Although Jimmy was a good ole Southern boy who lived deep in country 100 miles away from Atlanta, his understanding of human nature was far sharper than that of most urban sophisticates. Whenever I’d ask his opinion on some latest, wacky, software start-up we were sourcing for, he’d pause, consider it and then say in his Southern drawl, “Baaaaaris, I think they got lots a heat but little light,” and then break into deep baritone laugh.

Lots of heat but little light is exactly what we have going on the currency market, as no one really knows how to combat the financial crisis and authorities continue to blow more more hot air on an increasingly impatient public. Nothing was more embarrassing then the performance of Tim Geithner this week whose Richie Rich youthful looks and smarmy, pontificating delivery only highlighted the fact that he is completely unprepared for the challenge that confronts us all. The warmed over financial prescriptions from the Obama administration were nothing but a version of Bush lite - hardly the reason the country elected the man and if Barak Obama continues on this dithering path of appeasing his enemies rather working for his friends, he -not George Bush- will be known as the Herbert Hoover of the 21st century.

Ask anyone who is a professional on Wall Street and there is almost uniform agreement agreement on the proper policy solution for the financial sector - nationalize the big four banks (Citi, BoA, Wells Fargo, JPM) that control 80% of all deposits in the country. Guarantee the depositors, bankrupt the shareholders, ram down 50% haircuts to bondholders, recapitalize, stabilize and privitize with new management. Let the vulture hedge funds bid on all the asset backed paper sitting on the bank’s books at whatever price they want (I think most people will be surprised by the strength of the bids) and let’s just get this over with. In short as Steve Ballamer of Microsoft said, the whole system needs a reset. Welcome to capitalism 2.0.

However, instead of revolutionary change we have an incremental, technocratic approach of the Obama administration where all hope now rests on the “Hail Mary pass” strategy of the stimulus package. Yet fiscal stimulus without contemporaneous reform of the financial system is a prescription for disaster. It makes the former ineffective while doing nothing about the problems caused by the later.

For now the markets continue to give the benefit of doubt to the dollar. In one of the great ironies of financial life, the worse investors feel about the prospects for a quick US recovery, the better the dollar does as risk aversion flows continue to support the greenback - but how long will this dynamic last? For now the risk aversion/risk assumption trade remains in place, but we’ll watching for any early signs of its rupture which could signal that the dollar honeymoon is over. Certainly the Obama honeymoon is.

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US Dollar May Find Itself As The Top FX Safe Haven And Growth Leader

http://www.dailyfx.com/story/currency/eur_fundamentals/US_Dollar_May_Find_Itself_1234582169486.html

While the dollar exhibited incredible volatility this past week; for the most part, the increase in price action would not come with any defined direction from the world’s most liquid currency. Instead, the majors would further carve prominent wedge formations that will ultimately demand breakouts and a decision for direction some time soon – and that resolution may come this week. First, we need to take a look at price action to understand the building stress behind the markets. Both EURUSD and USDJPY have worked their way into terminal wedges that will force the market into a decision. However, from a fundamental standpoint, these two pairs highlight very different roles for the US dollar. When measured against the euro, direction will come from a bias in growth forecasts. Far more unique among the majors, USDJPY pits the market’s top two safe haven currencies against each other – and long-held rules may change.

It is well known that the Japanese yen is the go to currency for safety of funds concerns. This has been the case for more than a decade as Japan has kept its lending rates at or near zero (deriving an anti-carry interest) and the economy has floated large surpluses and savings. However, with global interest rates plunging towards zero and world-wide growth expected to hit its worst pace since WWII; investors are left to rethink where their capital is safest – and where it could also generate return when conditions do turn around. For the United States’ part, there little room for yields to deflate any further (they are also near zero). More importantly, though, they are far ahead of the curve on efforts to stabilize the domestic markets and economy. Constant liquidity injections, government guarantees, critical bailouts, proposals to draw out toxic debt that is clogging the credit system, the introduction of massive stimulus plans and endeavors to develop regulation for the long-term make for a strong foundation that few other economy’s can match. It is simply a matter of time before these cumulative stimulus catches up with the greenback.

The safe haven dynamic of the world’s most liquid currency (backed by the world’s most liquid ‘risk-free’ asset) has been a clear driver in all of the majors outside of the yen’s purview. However, as global policy makers attempt to put out the fires and interest rates near zero; we are slowly seeing a shift away from panic to growth. With global interest rates quickly approaching zero and more than three months of congestion under the market’s belt, fundamental speculation is focusing on gauging the world’s economies’ position on the recession curve. For those that are looking at relatively shallow and short contractions (and therefore expected to recover first), investors see the potential for return when risk has been fully exercised. The US is certainly a ways off from finding a true bottom in its own recession; but compared to Japan and the United Kingdom – its prospects look much better. Alternatively, when set against the Euro Zone, we are met with real debate. We will keep an eye on the round of second-tier data due this week, but the true shift in sentiment will likely be more closely linked to the efforts of the government to recharge the economy.



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