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Dollar Divergence In February Trade

Currency markets are looking to close out the month of February at the same price points that they started, with the new generation of trader and investor that looks outside of their own regional marketplace each day, seeing the US dollar being tested as the default go-to safety play. In the month of February interest rate markets have increased, Treasury note values have dropped, and emerging market equities have increased in value. However the rabid determination of regional central banks to hedge inflation risk, protect regional currency values, and to fight back against US dollar devaluation, has held global currencies in a very tight February range.

The dollar index is holding around the 77.50 price point, which is the same area that created a bounce off support at the beginning of February that moved higher to test 79.00 at the same time the equity markets also moved higher. The divergence between a move into the long side of equities equating to a short-dollar play was certainly not seen for three quarters of the month of February.

Inter-market correlations, especially those markets dominated by the US dollar which include bond and commodity trade, will have near-term periods of consolidation in equal measure to periods of divergence. February showed divergence between the global valuing of risk and the subsequent valuing of safety, hedging the manipulation by the Federal Reserve. It seems that Fed moves have veiled a public strong-dollar policy with short-dollar mechanics, which has created a unique period of trade.

The last three years of Client Notes have highlighted the fact that the globalization of traded markets has resulted in three very well defined periods of trade within any 24 hour session. Not so long ago traders would have time to review daily chart closes, and gauge sentiment during the quieter periods within any given day. That pattern however has changed, with each eight hour regional Asian, European, and US session, battling each other for fair value, and momentum.

Daily currency charts are each now housing the equivalent of what up until recently would have been virtually a week’s worth of movement. The major currency pairs offer very few times in any given 24 hour period that have low momentum and quiet price action. Trends will still form, however break-outs will be retraced completely as the next session of eight-hour trade unfolds. February is showing that most sustainable moves will come from red-flag economic releases missing the expected numbers, rather than technical set-ups breaking hard out of a range.

As traders and investors bought equity risk, and at the same time bought commodity hedges, the currency markets in February were not able to break and hold in-line with market sentiment, which is against the historical norm. These periods of trade do not often last too long, and traders will now be watching closely the eight hour regional reaction to equity futures trade as March begins.

The current period is a time that each currency will move because of regional outlooks on growth, expansion, and interest rate potential, rather than moving en-bloc against the dollar index. The fact that there seems to be no credible alternative to the US dollar as the global reserve currency at the moment will leave the February pattern of trade as an anomaly, rather than the start of a long-term trading pattern.

In general, fair value has been found on global currency trade, with intra-day traders buying support and selling resistance at the previous session high or low, especially when those price areas are being hit in the transition between one regional market closing as another opens. Whether it will be US dollar strength from a technical bounce on the dollar index from 77.50 which replicates the February move, or whether it's a second leg lower on the dollar index that will test the 76.00 area because of economic and social outlooks, traders will be very much aware that the short side of dollar index trade will not be easy to complete, especially now that global central bankers refuse to accept a weak dollar without global expansion and growth.