Technical Parameters in Equities, Oil

Last week's oil price break above $75 was an essential catalyst in accelerating the pace of USD selling beyond $1.50 in EURUSD, 0.93 in AUDUSD, and 1.03 in USDCAD. Technically, the next oil barrier emerges at $82.00 (100-week MA), a break of which would extend the rally towards $89.90. Coincidently, US equity indices also face their next resistance at the 100-week MA (1,100 for S&P and 10,209 for the Dow). But a more important landmark for the S&P500 stands at 1,121, which marks the 50% retracement of the decline from the October 2007 high to the March 2009 low.

Recall how oil prices repetitively failed to break its 200-week MA of $75.70s in August and September until recurring dollar weakness (hawkish central bank outside US) empowered oil traders to breach the key level. The simultaneous technical resistance in both of these high profile instruments (US crude and S&P500) may well dissuade the accumulation of fresh risk appetite. And Wednesdays downgrade of Wells Fargo may have been instrumental in stepping up trading volumes in a down day. But the only viable means for dollar bulls to see hope again is the implementation of the exit strategy. Short of such implementation, earnings disappointments and/or negative guidance, FX traders will see little resistance to selling the dollar.

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Fed Ought to Stop Talking About the Dollar

Federal Reserve officials should either get the same vigorous training when making statements about the US dollar or completely refrain from taking about it, and allowing the US Treasury exclusive authority to comment on the currency.

For the second time this week, a member of the FOMC causes more selling in the dollar after choosing to shed light on the US currency to the public. 30 minutes ago, Boston Feds Eric Rosengren (not a voting member in this years FOMC) said the decline of the dollar reflected investors improved confidence with the economy and their resulting appetite for risk. While such remarks are no more than a stating of the obvious as far the current FX market dynamics, they constitute an overt green light to sell the currency, especially when uttered by policymakers of the interest-rate setting body of the US.

On Monday, Chairman Bernanke may have intended to support the dollar when he raised the importance of timely exit strategy, but the way he went about it had the opposite effect. Bernanke said adopting a fiscal exit strategy "is critically important in order to maintain confidence in our economy and confidence in our currency". So far, the Fed has made it clear it would not be exiting its monetary policy strategy any time soon (aside from talk about reverse repos). Bernankes speech has placed the onus on the Treasury as far as fiscal policy is concerned.

And since fiscal tightening by the US Treasury is not expected any time soon, traders easily conclude that the lack of any exit strategy (fiscal or monetary) implies will empower them to retest last year's all time lows in the greenback.

Comments

[Sevens:]

"But the only viable means for dollar bulls to see hope again is the implementation of the exit strategy."

Not sure what concerns me more...that there are still "dollar bulls" out there, or that the leaders playing with the livelihood of our currency have to remind themselves to have an exit strategy for any policy.....

Oct 22 04:48 PM

[Cliff Wachtel:]

The usual excellent post. I read your articles as soon as I see them & recommend the book to everyone.

I'd suggest that the more likely near term savior for the USD is a sustained selloff in equities occurs ( seems likely, given high stock valuations, remaining deep unemployment/banking/c... risk troubles, coming rate increases - relatively soon for the commodity currencies, which puts pressure on Fed), that could bring at least a short term bounce for the USD - if for no other reason than massive USD short unwinds out of riskier currencies.

Given the above problems, it's hard to see how the US can raise rates in the foreseeable future. Raising rates could be a cure that's worse than the disease. Opinions?

Oct 23 02:45 AM

[Sevens:]

On Oct 23 02:45 AM Cliff Wachtel wrote:

> "I'd suggest that the more likely near term savior for the USD is
> a sustained selloff in equities occurs ( seems likely, given high
> stock valuations, remaining deep unemployment/banking/c... risk troubles,
> coming rate increases - relatively soon for the commodity currencies,
> which puts pressure on Fed), that could bring at least a short term
> bounce for the USD - if for no other reason than massive USD short
> unwinds out of riskier currencies."
>
You hit on a number of issues as to why I can't buy into equity valuations (particularly Dow) at their current levels. When the financial sector pushes the market up or down 100 pts based on earnings projections, and those healthy earnings they enjoy right now are based on 0% interest at the Fed window...sure smells like a house of cards, as they can't keep printing money to monetize debt & collect 0% interest as the price of risk. Just the mere earnings report from one large bank pushed the USD down...how lame is that??
I can't speak to the massive USD short relative to riskier currencies as it's not my wheelhouse, so for clarification, are you saying there are a lot of traders holding long Yen/Mark/whatever - short USD positions right now vs holding shorts in USD relative to other commodities?

Oct 23 06:49 PM

[a fat panda:]

"if for no other reason than massive USD short unwinds out of riskier currencies. "

What currency is riskier than the US dollar? Until someone gets serious about currency stability, the dollar is the riskiest currency.

Sure, the dollar is due for a bounce regardless of source. That doesn't mean that it will hold the lows over the longer term. The Aussies have raised rates. As other foreign central bankers raise rates, the dollar will resume its downward trend. The problem that the dollar has is that it is a less a effective store of value than oil.

On Oct 23 02:45 AM Cliff Wachtel wrote:

> The usual excellent post. I read your articles as soon as I see them
> & recommend the book to everyone.
>
> I'd suggest that the more likely near term savior for the USD is
> a sustained selloff in equities occurs ( seems likely, given high
> stock valuations, remaining deep unemployment/banking/c... risk troubles,
> coming rate increases - relatively soon for the commodity currencies,
> which puts pressure on Fed), that could bring at least a short term
> bounce for the USD - if for no other reason than massive USD short
> unwinds out of riskier currencies.
>
> Given the above problems, it's hard to see how the US can raise rates
> in the foreseeable future. Raising rates could be a cure that's worse
> than the disease. Opinions?

Oct 23 07:11 PM