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Near-term Test Of Usd Buying

Global market trade continues to hold the sideways crawl that buys support and sells resistance on the 4-hour chart channels, with low-volume price ramps hitting as regional markets open and close. Soft commodities have moved back towards tests of yearly highs, backed by solid buying interest in gold and silver that is undoubtedly backed by speculative interest hedging potential forward volatility in Usd valuations.

On days of Usd strength and global equity weakness there may be pull-backs towards 27.20 on silver, and 1355 on gold, and recent trade has shown that buyers are there who are prepared to buy the dips. The fact that both markets are so bullish and have weathered decent bouts of selling also reflects unwillingness for market participants to be overweight the dollar. There may not be room for a dollar collapse as some were expecting in the post-QE2 environment that has the Federal Reserve monetizing Treasuries, but the commodity market is proving that long-term plays in gold and silver may temper long-dollar, long-term trade.

West Texas Intermediate crude oil trade has pushed higher through 88.00 a barrel in a move that looks to be well supported and sustainable. Without strong increases in global growth the moves to get long-oil seem to reflect the same thought process as gold and silver; a hedge against volatility in the dollar market that negates the impact of $550b of Fed POMO auctions still to come over the next five months. The main beneficiary of the long-oil play will be Usd/Cad that is now testing parity again at $1 per C$1.

The near-term chart trend and momentum reads are moving away from the Usd, which is against the mid-term 4-hour chart reads that show long dollars on very weak momentum. The reaction to the Non-farm Payroll numbers may be instrumental in revealing the strength and depth of November dollar buying, and may be the instigator of a period of trade that breaks recent price channels.

Be it strong equities, weak bonds, reversals or break-outs in global commodities, or just more of the same low-participation ramp-up or ramp-down plays as each regional market opens and closes, the currency market will offer opportunities to hedge whatever the global risk market decides to do.

The trading period from December 2009 through to September 2010 followed a very concise pattern of equity, and by default inverse Usd trade, in holding an overall direction in reaction to each month's Non-farm Payroll jobs report from the U.S. Whatever the sentiment and reaction was to the release at the beginning of the month tended to hold true for the subsequent three weeks.

October and November however have been months that the economic and fundamental picture became so blurred with QE2 expectation and the unique economic environment it created that risk was taken off the board for anything other than a session at a time. The consequence of the Black Swan economic event that has unfolded over the last two months has been seen in sideways 4-hour trend and momentum charts and sporadic currency price action as each regional market opens and closes.

Macro economics are dominating near-term global market valuations, with traded markets absorbing unique plays by central bankers trying to get agreement on Usd, Eur, and Chinese yuan valuations at a time that global growth seems to be coming by artificially instigated means.

How this transpires is open to discussion, with no clear picture forming as to the sustainability of quantitative easing programs by the Federal Reserve, liquidity infusions by the ECB, inflation concerns at the Bank of England, real growth challenges for the Reserve Bank of Australia, continued stagflation issues at the Bank of Japan, and the Bank of Canada facing unique economic challenges.

The daily chart reads on the major currency pairs are all tracking sideways, holding a long-dollar mode that is now getting thoroughly challenged. Recent trade has allowed the 20 and 50 Simple Moving Average areas to come into play, as price points that when broken that will instigate increased momentum that may have December breaking and holding a range as month, quarter, and year-end book balancing and window dressing takes place.

The next Federal Reserve POMO is Friday 3rd December, when $6-8 billion is intended to be monetized, as part of the $600 billion that will hit the market over the next 6-8 months. 

The Fed's Permanent Open Market Operations are not an asset relief program, instead these are Treasury Notes that are being monetized. The Federal Reserve is buying back Notes with the idea being that the freed-up money from dealers not now holding Treasury notes will be put to use buying other asset classes (hopefully in the Fed's case, stocks).

The big currency gamble is in the fact that dollar-based Notes are being monetized but the liquidity may not go into dollar-based equities. Overseas markets could get the brunt of the equity liquidity if things do not go as planned. This is unchartered Fed territory and right now looks to be creating commodity and equity inflation that may not have the desired effect of instigating growth and economic activity all of the time that retail investors remain on sidelines.

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Disclosure: TheLFB runs an automated trading program that is constantly one side of the dollar or the other, in-line with the detail posted in the article.