Replies to post #1921 on Stock Incubator

[dalcindo]

Article: US Dollar Outlook Depends on Federal Reserve – What Can We Expect?

Friday, 12 February 2010 23:24 GMT

By David Rodriguez

(Source: http://www.dailyfx.com/forex/fundamental/forecast/weekly/usd/2010-02-12-2324-US_Dollar_Outlook_Depends_on.html )




Fundamental Outlook for US Dollar: Bullish

- US Dollar gives up ground as Euro Zone plans Greece bailout, markets rally
- Disappointingly vague plan nonetheless sparks S&P pullback, Greenback rally
- US Dollar risks pullback in the context of a broader reversal on futures positioning


The US Dollar finished the week almost exactly where it began, confounding traders with volatile short-term moves yet remaining nearly unchanged. Similarly choppy price action in the S&P 500 underlined financial markets’ indecision and gave few clues on future short-term direction. It seems that financial markets have reached somewhat of an impasse. On the one hand, months and months of stock market advances leave more medium-term momentum to the topside. On the other, the S&P 500 and other major indices remain in a clear bear market and risk further losses following a fairly long period of appreciation. Determining which scenario is most likely is critical to establishing a clear trading bias for the US Dollar. As one of the lowest-yielding major world currencies, the Greenback often falls victim to speculative selling as traders buy higher-yielding currencies. Yet strong bouts of financial market risk aversion most often force substantive US Dollar rallies, and it remains critical to watch risk trends through short-term trading.

Options markets short-term volatility expectations on the US Dollar have pulled back in recent trade, but speculators should watch for any surprises in US economic event risk through the days ahead. Top events will start with Wednesday’s Minutes from the most recent Federal Open Market Committee rate decision to be followed by the following days’ Producer and Consumer Price Index reports. All three events threaten to force substantive shifts in market interest rate expectations and, by extension, the US Dollar.

FX traders will watch whether the FOMC gives further hints on when it may begin raising interest rates in 2010, while any especially large surprises in PPI and CPI could likewise offer clues on the trajectory of central bank rates. Fed Chairman Ben Bernanke recently outlined the steps the central bank could take to begin withdrawing massive monetary policy stimulus in an address to the US legislature. How soon those plans can be put into action wholly depends on the pace of economic recovery and trends in national prices. Recent disappointments in US Nonfarm Payrolls data would imply that the FOMC is in no hurry to tighten monetary conditions. Yet it serves to note that Kansas City Fed President Thomas Hoenig dissented in a 9-1 vote to keep the Fed Funds rate near zero for “an extended period”. Whether or not his relatively hawkish bias will gain broader traction is an important topic and it will be important to monitor the statements from the FOMC minutes.

If the Fed shows any willingness to tighten rates through the coming months or we see any substantive surprises in PPI and CPI data, the fragile US S&P 500 could break considerably lower and send the US dollar higher. Overnight Index Swaps show zero percent probability that the Fed will raise interest rates through the coming months. Stock markets rarely respond positively to higher borrowing costs, and any signs that rate hikes could come sooner could easily crimp risk sentiment. Given clear indecision across financial markets, clarification could spark the trends that most traders crave. - DR

When do you think the dollar will break? Will the next drive be bullish or bearish? Discuss the dollar’s future in the DailyFX Forum.

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- Dalcindo

[dalcindo]

Re: USD

Hi 3x!

Looks like additional fundamental events will provide further fuel for the USD to gain against the EUR and other major currencies as well.

In addition to investors unease regarding the Eurozone situation (still no concrete plans have been expressed to help Greece, while a suspicion that other weaker countries could follow suit as well such as Portugal, Spain and Italy), now comes this Fed move, which is said to normalize its discount rate. Although pretty optimistic in appearance, the move follows what other countries have already done as anti-inflationary measures.

Investors might look at the bigger picture, such as recent and repeated Chinese banks to rein in on their liquidity control and that of other banks as well, suggesting a global concerns for inflationary trends.

So, when less currencies circulate, a more difficult access to a smaller pool of cash increases the cost of borrowing, further stifling borrowing powers of individual businesses - as if lending practices were not difficult as it already is.

Overall, the USD will likely gain further strengh against the EUR, not only from a safe-haven provision AND out of concerns of what is going on in Europe at large, but ALSO from a mere fiduciary stand-point: If countries in most corners of the world are making it difficult to unleash cash and boost stock prices up, then what better than the good old Dollar to reap profits in uncertain times, especially when the Fed move is suggesting economic recovery in the context of other world turmoils.

Any Fed body language hinting at sign of steady recovery (such as this distancing from an emergency borrowing rate to a more normal discount rate) will likely continue to pressure risk-seeking investors towards risk-adversion positions, thus adding more momentum to the bearish trend of the EUR:USD trend, which we've seen commencing recently, IMHO.

My current EUR:USD position: SHORT in Both day trade and now swing positions.

- Dalcindo