Peak-Contraction-Trough-Expansion-Growth, are the five cycles of an economic Business Cycle, and each phase of the cycle reflects in an economic region’s currency value. The cycles run over an average ten to fifteen year period.
As we look at the U.S. phase right now we see that the next move from the Trough is into Expansion, and that can be lead by economics, sentiment, or a mixture of both. The reasons why or how it all happens can be debated forever, the bottom line is that the next phase of trade is here..
The stark reality is that now, the Usd may be getting sold now that the phases of Contraction and Trough have already happened. That means there is an upward target of sustainable Expansion that may lead to Growth over the coming three quarters. Growth will come, it always does, but the relative strength of the U.S. cycle compared to other regions may not be as robust.
The U.S. is following the phases the same way other regions are, but the difference is that the U.S. is going from boom to bust a lot quicker than other regions. The cycles are getting shallower, and are coming in shorter five to eight year cycles, creating volatility in dollar valuations. The downside of that is that the Usd does not have time to re-establish new values as well as other currencies, and because of global commodities being priced in dollars the quicker cycles can create inflation pressures that are historically stronger than previously noted. The killer effects of inflation, coupled with increasing debt levels are weighing heavily on the U.S. business cycle's lifespan.
As the U.S. moves along its own cycle, so the global economies follow theirs, but right now the moves are out of sync; the global market's Peak phase came at the same time as the U.S. Contraction phase started, and that is now leading to a period where the U.S. tries to expand ahead of overseas regions. The real question now being, how the market prices Usd based debt; any GDP growth will be negated by forward debt valuations, especially if overseas regions are expanding soon after.
The U.K. is dealing with every bit as strong a recession as the U.S., and is seeing consumer confidence levels stripped to the bone. The Euro-zone is suffering an economic slow-down from the effects of the credit crisis and reductions in bank lending. Australia is down-grading overseas debt and absorbing interest rate analysis and implementation that was set in an effort to control the Contraction phase of the global market. New Zealand put in place a rate reduction campaign in an effort to control the slide from Contraction to Trough, that is now being reversed. Japan has struggled in their Business Cycle phases, and has set a set of rules that are unique, lead by stagflationary pressures.
All-in-all we are seeing a base in global economics as the Trough phase completes, and as a consequence of that the value of the Usd may automatically decrease after the U.S. has already absorbed a lot of Contraction-related bad news. As the U.S. looks to get out of the Trough the other major pair economic regions may become empowered by the U.S. consumer, and in the near-term that may be enough to allow them to overtake the U.S. because of far less debt to finance. Those moves will decrease dollar valuations, increase oil prices, increase global inflationary fears, and allow a period of trade to happen where, for the first time in twelve to eighteen months, the dollar finds sellers in strong enough numbers to be able to break 78.00 on the dollar index.
This may turn out to be the start of a sideways distribution phase ahead of more dollars getting sold over the next year, as the U.S. administration deals with a public 'Strong Dollar policy that is anything but wanted in reality. The most robust periods of U.S. economic expansion have been on the back of a weaker Usd, and with the amount of Usd based debt now in the market, it may be very difficult for the dollar to do much more than reverse near-term oversold conditions on the days that equity markets go lower.
In the near-term, history tells us, these Business Cycles have more of an impact on currency valuations than anything else; and that is what we are now starting to see reflected on our charts. The four hour cycles, the near-term support and resistance, linear trend-lines, and daily SMA areas are all getting threatened at the same time. If it does break as Usd weakness it will be a technical reflection of a shift in the global Business Cycles. The U.S. Expansion cycle historically comes from a sustained period of Usd weakness, and that is what we are about to see it seems, if global equity trade holds in the green.
Whether we like it or not, the signals are here that the markets just cannot get the Usd much higher, it will not go up when other related markets are moving lower. We may have found a near-term swing point, and if oil prices get back above $75 a barrel it may be that 75% of our attention needs to be on short dollar set-ups, following the global Business Cycle path.