Dollar Strength? It's All Relative

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Includes: DBV, UDN, UUP
by: The LFB

Big Economics: The major forex pairs and global markets are now positioning ahead of a busy economic calendar today, that is very likely to force a new fair value on risk and debt by the end of the Wall Street session. The calendar is packed with important macroeconomic detail, such as the Bank of England's Inflation Report (05:00 EDT), and the FOMC meeting conclusion (14:30 EDT). Don't forget, in between those, at 14:00 EDT, the U.S. Federal Budget is released, where the monthly difference between income and expenditure of the Federal Government is disclosed.

The Budget Deficit for August is -$93B current monthly deficit is set to be dwarfed by a -$175B print today; now, that takes some doing, and is a staggering number that is nearly beyond belief in that a 100% increase in the Government spending over income, in just a month. However, in the days of lines of zeros after the dollar sign, all this actually does is get the deficit back to the June read; the July move from -$183B to only -0$93B is set to be reversed again. Maybe that is the reason that nobody reports the change; there are too many zeros floating about to make it realistic.

These group of reports were responsible for a strong degree of volatility in the past, and the same might be the case today. Over the last few days of trading the dollar index has been moving side-ways, in tight ranges that have a near-term bullish feel to them, but that is not likely to happen from Wednesday onwards.

Big Dollars: Today’s reports are likely to have a crucial role in the forex market, by either extending the dollar’s downtrend that started in early March, or in helping the dollar retrace some of the ground lost earlier in the month. Either way it wants to go, expect a trending market over the upcoming trading sessions once these numbers are in the market domain, and expect the momentum reads on each global market component to start to get aligned in one direction.

Long trends and oversold momentum, equals a possible swing point on the Usd drivers, oil. gold and equities. We are looking now for the economic calendar to kick in and lead things fundamentally. If oil and equities start to move, so will the currency market, and right now that overall trend still short the dollar, but as we have seen this week, the market is ready to buy the greenback the moment that stock traders get jittery about locking in profit; however the near-term momentum reads are all over the charts, and market-wide volume is very thin, and very sporadic.

Gold, oil and the euro have succumbed to Usd buying overnight, but the equity markets still have some fight in them to hold the higher ground, albeit that Chinese markets are lower by over 4% in trade on Wednesday. The oversold reads are increasing on the 4 hour charts, and although a market can stay oversold for longer than most would expect. A reversal from support may be required before oil, gold and equities can go too much further, especially on a day of such big economics.

Big Debt: To get things into context, let's look at what $175b of deficit is; one dollar bills stacked together would create a structure that replicated the size of most football arenas, or the average office block. The stack of bills would be 500 feet long, 100 feet tall and 125 feet wide, and if stacked individually would be 10,500 miles high. It equates to $600 for every person in America; man, woman, and child, and looks like this; $175,000, 000, 000.

However, not to worry, because in November it looked like this; $237,000,000,000, and when compared to the total National Debt, is absolutely nothing at all to worry about. However, that will not stop the re-alignment of fair value ahead of the numbers. By the way, the National Debt, as issued by the Treasury Department in March 09, looks like this; $11,046,247,657,049. What were we worried about? So long as the rest of the world keeps buying dollars, and adds to the red deficit numbers above, there is nothing at all to be concerned about. What are a few zero's between friends, and these friends are so far into this debt mountain they may never get off it.

USD Strength: It certainly puts the terms "Strong Dollar Policy", and "USD Strength" into perspective. This is a debt mountain like no other, and unless the U.S. consumer starts consuming, it will continue to build. Creating more debt, to lend out to already debt-ridden consumers, is what happened in 2002 when the previous stimulus packages were issued; cut taxes, create credit, print dollars, increase the debt mountain, so that interest payments on the debt can be paid. Sound familiar? That got the U.S. economy five years of expansion, and in 2007 it all started to unravel, again.

Dollar Conundrum: In the mean-time the debt continues to grow, and until the credit based consumer junkies are drip fed more lines of credit, the mountain will get bigger. That leaves another five year expansion cycle to follow, probably from 2011 when the reported 30% of U.S. homes are back from negative equity territory, and is something that will all implode again when that credit line runs dry. Dollar strength? It is all relative, and as overseas holders of U.S. debt know, a stronger dollar is what is required to allow the mountain to be funded at an attractive rate of return; conversely a weaker dollar is what is required to keep the credit addicted U.S. consumer alive.

Max Pain In Oil: Near-term dollar strength will come from the speculative interest in oil getting in-line with global demand, and increasing global inventories. All of the time that full tankers are parked at sea, instead of delivering crude, the long-oil trade is susceptible to a pull-back. The Usd will also find buyers as equity markets find sellers, in the ultimate risk-averse play that goes out of stocks, and into the world of inflated Treasury markets.

Relative Strength: The credit crisis has created a new financial rule-book that is yet to be completed, and in the mean-time forex traders will understand that dollar weakness is what is required for the economy to recover, along with positive equity trade, and on the days of dollar strength it will be understood that the trade is out of market necessity, and not out of desire.

Long-dollar positions are hedges against global risk, whereas short-dollar plays are where global growth will come from. Dollar strength? It is all relative.