Since we are coming to the end of the month, it is worthwhile to look at the dollar not only in terms of its daily performance but its general trend as well. Wednesday’s session ended in the red; but selling momentum was markedly curbed. This is both remarkable given the developments in Treasury auctions and European finances; and at the same time, it is exactly in line with the lack of underlying speculative investment and the lack of tangible event risk. Yet, when all is said and done, performance is a function of the market’s concerns and forecasts. In these regards, we can see the stain of fear quite clearly. In the past 13 active trading days, the Dollar Index has declined nine times. More importantly, the pace to this bearish move accelerating as it crosses technical boundaries. In fact, if we were to stamp the week at Wednesday’s close, we would be looking at the biggest decline on this higher time frame since May of last year. At this point, technical momentum is finding its greatest support from the remarkable rallies for EURUSD (the most liquid currency pair in the market) and AUDUSD. Additional drive could be encouraged should GBPUSD, USDCAD and USDJPY forge their own trend-bearing breakouts. Yet, considering many of these pairs are already at or near multi-month or -year highs; we need to consider how feasible it is to maintain aggressive selling without obvious ‘excess value’ to unwind.
If we were looking to indentify the primary fundamental current behind the greenbacks’ descent through the past 24 hours, we would come up with the same catalyst that has maintained selling pressure through the past two weeks: speculation of stimulus expansion by the Federal Reserve. How far can mere conjecture of a fundamental event extend without hard evidence that it will occur? As long as the fundamental backdrop is conducive to these specific concerns and the dollar keeps breakout through support levels, the self-sustained move can last for a longer time than many investors’ fundamental convictions can hold out. Through Wednesday’s session, there were no significant risk trends to interrupt the dollar’s debasement with questions of safe haven status. Furthermore, we are reminded of the fragile situation the US finds itself in when we consider that in between Fed Treasury purchases, the Treasury itself is still selling debt at a remarkable clip. A $29 billion issue of seven-year notes today drew a record low yield and the highest bid-to-cover since the maturity was revived. Low yields are helpful from an economic perspective as they reduce lending costs for consumers and investors in a bid to maintain the recovery. That being said, the natural reaction to increased supply of Treasuries is reduced face value and increased demand for return (higher yields). The Fed’s purchases are encouraging speculators to ‘front-run’ the stimulus effort which backs international demand for US safe haven assets. Realistically, this is not a long-term solution. The cracks are already showing through. It was rumored in the Asian session that the central banks of Singapore, South Korea, Thailand and Indonesia all intervened on behalf of the dollar. This mix of stimulus, intervention and speculation can’t hold forever.
Expanding our focus from the dollar specifically to the markets in general, all traders should take note of the marked change in activity and associations. We have already noted deterioration in correlations; but the transformation runs deeper than that. Recently, brokers have reported steep declines in trade revenue, major hedge funds have shuttered and flash crashes are becoming more frequent. Seismic changes.
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