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The answer to "What's going to give the Fear Index a boost ?" was staring us in the face all along .... The threat of Thermonuclear War,...

August 11, 2017

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Is that a trend I see ? Not yet, it ain't ...... ref :- "Dollar shows resilience in battle with Euro" , The Financial Times, Currencies Analysis

January 9, 2018

 

 

We all know how profitable it can be for investors to spot a trend forming, to get on board early and ride it to rich returns. Depending on how long the trend lasts, you can play with profits (the market's money, as they say) to maximise rewards and you don't run the risk of getting in late and at the top of the move. Remember 2017, when a big majority entered the New Year as dollar bulls and confident that the Trumpflation effect would continue to give the US unit another leg to its long rally ? The opposite happened almost from Day One, and the sharpest of the wrong-footed dollar bulls were those who were quickest to recognise the new dynamic and reverse their positions.

 

And so it is that at the start of 2018 everyone is trying to identify the trend for EUR / US$. They always are of course, regardless of the time of year but rightly or wrongly the early move is often seen as setting a pattern, and this first trading week has seen particularly interesting action with the Euro trying (and failing so far) to break new ground on the upside and the Dollar showing enough resilience to suggest that continued weakness is definitely not a foregone conclusion.

 

The desire to be amongst the first to identify when a move becomes a trend is absolutely understandable, but investors also need to be wary that in their enthusiasm they don't misinterpret market oscillations as something more definitive  --  premature conviction can be costly. The first week in January saw EUR/US$ pressurising $1.21, supported by strong Eurozone manufacturing data. A break of that level would have set a new high and no doubt set off predictions for the next upleg in the Euro rally. It was not to be ..... not so far at least. The fact that the Dollar has been able to recover to $1.1925 despite Friday's US employment data (that in itself should not have supportive) might be of some concern to the Euro's supporters.

 

These moves are significant for short-term professional traders who can take advantage by quickly nipping in and out of a position and are often content to nick a few points out of much smaller moves than that. But as far as identifying the next trend goes, 2018's action is still inconclusive. The arguments that were being put forward 10 days ago still apply .

 

If you take the minority view that imagines a bounce for the Dollar, you'll be looking at soaring US stock prices after the passing of tax reform in late December , rising US Treasury yields that only widen the interest rate differential that the Dollar enjoys over the Euro, and notwithstanding Friday's numbers a very tight labour market that will soon exert upward pressure on inflation and therefore interest rates. Technically speaking,you'll be encouraged by the failure to break $1.21 and you'll also like CFTC reporting data that shows large speculative positions are mostly in favour of the Euro , making them vulnerable to getting squeezed.

 

If you still fancy the Euro you'd point out that the failure to make new highs is merely a case of the currency taking an understandable breather rather than any reversal of longer trends. You might add that the interest rate differential will not work in favour of the Dollar as the Fed's policy outlook is well-known and consequently this year's rate rises are already largely priced in. In contrast, against a background of a booming Eurozone economy, the ECB has barely started the process of adjusting policy. A level of QE is still in place (at least until September), and rates will remain at or below zero for some time. But given the very strong economic fundamentals, that must change. The US is much further along the tightening circle that the Eurozone has yet to start, and therefore in terms of support for the currency derived form monetary policy normalisation, there's more mileage in the Euro.

 

Or so goes the argument ..... but surely, you can't just ignore three (or will it be four ?) US rate hikes that we can expect this year ? Apparently so, according to some. Deutsche Bank and JP Morgan Chase both point out that the Dollar weakened between 2004 and 2006 during a sustained period of rate hikes. And besides, according to Deutsche the interest rate factor will be less important than capital flows into asset markets. US assets are already so expensive that the Eurozone is a more likely destination.

 

You know, we often whether the pressure to say something interesting forces commentators to attach much greater significance to minor market moves than they deserve (if you a longer-term player, that is). The fact is that despite the claims made by both sides we are little closer to divining the next major move. If the Euro and the Dollar were boxers, you could sum up the first round (or more accurately, the first part of the first round) as jab and counter-jab with no telling blows yet landed. But at least it looks like more of a match, and even if the long Euro story is still significantly more popular we know that majority start-of-year views on currency markets have a very mixed record of late.

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