The Current Currency Conundrum

Jan.19.12 | About: PowerShares DB (UDNT)

Currency traders are reliant upon the global equity and interest rate market direction to indicate on a regional basis the acceptance of risk, and by default at this time the value of the USD. Intra-day currency charts are clearly showing that momentum waves are hitting harder as regional commercial markets in Asia, Europe, and the US, open and close for business and start the daily grind of finding fair value on risk in each economic region.

The global business cycles are not yet showing signs of growth and there is no confirmation that the contraction/trough phase is finished. That is the main reason the USD is having such a hard time each day holding fair value, and why the major currencies traded against the dollar are becoming increasingly volatile.

When either contraction or expansion are in place in the global business cycle it is fairly easy to value risk via the volatility seen in stocks and via the interest rate spreads on bonds and Libor (inter-bank lending rates). When these phases of the business cycle are in full swing currency values will be trending and the ebbs and flows of daily trade will continue in the overall direction of the trend.

When the markets transition from one business cycle to the other and hit a period of consolidation ahead of the trend change, as the market may be doing right now, the ebbs and flows of currency trade have to adjust three times a day rather than once, as each regional global market re-positions itself for a new value on the price of risk.

The new value on investment risk is seen in wider bond and Libor spreads, higher equity bid values, and also in the volatility of regional currency moves that cannot hold attempted breaks of tightly held ranges. Major currencies finished 2011 at similar values that they started from, confirming that high volatility cannot easily form a currency trend in the current economic environment.

In the last three months there have been one or two sets of 30-minute trade each day, on each pair, that housed most, if not all, of the daily movement. The subsequent follow through has not been worthwhile monitoring. The major pairs are all at their main 2011 swing points, and back to areas that were formed in December 2010. That however may be about to change as Quarter One of the New Year tends to more easily break and hold a range than any other.

The US dollar stands head and shoulders above all others regarding the sheer number of bills in circulation, and a move on the dollar index (DXY) impacts so many more areas of the global economy that any other printed currency. Of all the main global asset classes the dollar index has the slowest moving reaction to breaking news headlines, and the lowest average daily trading range.

DXY is 10% off its 1996 valuations around 85.00, which is a swing point area that has been in play every year between 2001 and 2010. The strong inverse correlation between equity risk and USD relative safety that has both asset classes moving inversely will be hard to break. If S&P 500 equity indices trade holds above 1150 support, DXY will struggle to break above 81.50 resistance.

For the first time in a decade traders saw a year that was unable to touch 84.00 on DXY, which may signal a re-newed move against the dollar forming on the long-term charts.

Disclaimer: Bull or Bear, trader or investor, the above content reviews both sides of any situation with impunity in an effort to create fair and balanced output. Reactive markets require reactive analysis and an ability to accept changes as they happen. A headstrong opinion may be an impediment in the new-generation roller-coaster global trading arena; however, a systematic process of balanced analysis will always be an asset. Information, analysis and methodologies provided are for informational purposes only, obtained from sources believed to be reliable, and should not be used as a replacement for research by an individual investor or licensed investment professional. In no event should the content of this correspondence be construed as an express or implied promise, guarantee, or implication that profits or losses can be made or limited in any manner whatsoever. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.