After falling incessantly for over a year (since The Fed hiked rates in Dec 2016), the Dollar Index has gone nowhere for 3 months. Holding around the 90 level, with small oscillations, despite all manner of geopolitical, economic, and market shocks. The reason for this relative calm – while volatility elsewhere explodes, as former fund manager Richard Breslow notes, is that there are too many theories out there.
In moderation they can be insightful, clever and helpful.
When markets become confused and defy obvious explanation they can turn out to be the opposite of all of the above.
Especially when you have a lot of price ranging. When that happens it can help to block out the analytical noise and see what you can perhaps glean purely from the asset prices.
It hasn’t been an easy thing to do under current circumstances. I have a theory why.
One thing that appears to be going on is that in its own halting and frustrating way, the dollar is trying to see if it can probe the upside. Tons of reasons are out there why that can’t and shouldn’t be. For some a weaker dollar has become almost a moral crusade. Nevertheless, for whatever reasons and individual country specific news notwithstanding, it’s happening. And it is broad-based, even if nascent.
Of course, this could all just be another example of stale positions being put to the test, but it doesn’t really matter for a trade. And this has been developing whether the news flow has been dire enough to send equities skidding — or like today, when I’m told, for reasons that escape me, that the world is a happier and safer place.
Maybe it’s working backwards, but I’ve been struck that the allegedly bullet-proof emerging market currencies are beginning to wobble. To be fair, the MSCI emerging market currency index has all sorts of minor technical support levels to hang your hat on. On the other hand, this morning, it’s doing a very good job of looking like it could have its first close below the 55-day moving average since last November. Is it Turkey, South Africa or Russia? All of which have their own “stories?” You bet, but that doesn’t matter as they are helping to test the resiliency of the regional sub-indices. Want some reals?
The dollar index has been having trouble making marked headway higher. However, it’s doing a commendable job of holding above 90. Which seems to be a sentiment pivot of some importance.
It’s close, therefore well worth keeping an eye on. Especially with Europe, and Germany in particular, racking up misses and the Citi European Surprise Index looking it’s trying to dig a hole to China.
Even the NAFTA currencies failed to follow through last week when it looked like they had a serious opportunity to continue to rally. Say what you will about non-farm payrolls, but the Canadian employment report was absolutely solid. And the currency weakened. Despite renewed calls for a test down to 1.25 versus the dollar.
And as for the supposed safe havens? Momentum in CHF and JPY is not to the upside. Very much the opposite. Fading their central bank speakers dovish message hasn’t been the ticket.
The way the dollar is trading, it’s unclear whether good news is good or it’s bad news doing the trick. Don’t trust knee-jerk reactions. Just follow the price action.
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