Here’s Why It’s Different This Time…

  • November 10, 2004
  • Dave Floyd

It
seems it was just yesterday when we were preparing for an FOMC rate decision. 
The FX markets have a way of making time pass in a very rapid fashion. 
Nonetheless, today’s meeting is pretty much a given that another 25 bp’s will be
tacked on, bring the fed funds rate to 2%.  What has changed since last time,
however, is the overall strength of the economy.  Last Friday’s job data has
laid to rest, at least temporarily, the notion that the economy was in a
perpetual soft patch.  Nonetheless, with rates on the rise here, and an economy
gaining momentum, the dollar remains under pressure.  The EUR, CAD and CHF
remain the currencies that have most benefited from the dollar slide and
consequently, the ones that remain quite vulnerable to any dollar strength.

However, picking tops and
bottom can be a fool’s game.  The dollar decline, at least when viewed
long-term, is structural.  Yes, there will be respites along the way, but
gravity will ultimately win unless the deficits are brought under control. 
There is a small window for nimble traders to isolate the inevitable mean
reversion bounces.  With rhetoric from the ECB and BoJ, an unknown component to
the Fed statement tomorrow, and most importantly another potentially bad trade
balance number (-$56 billion est.) that time might be drawing near.  So, with
positions stretched, rhetoric on the increase, a curve ball will offer the
nimble and alert trade a tradable bounce in the dollar.

Technical Notes:

EUR/USD:  with 1.3000 looming
large and many traders long, any minor pullbacks might shake out weak longs. 
Comments from the ECB have done little to dampen bids for the EUR as the
mentality continues to be “anything but the dollar”.  Look for 1.2940 and 1.2906
to act as support

GBP/USD:  like the EUR, the
pound is flirting with key resistance, 1.8600, but some technicals we view are
beginning to diverge, suggesting that higher levels may be a few days away
still.  Intra-day support is seen at 1.8555 and 1.8508.

USD/CHF:  stretched to the
downside is all you need to know here.  However, picking a bottom can be
elusive.  The trade data put a bid in the dollar, but overall the initial bounce
is all that the market has seen, and that has now been faded back to new lows on
the day.  Tricky conditions for dollar pair traders. 

AUD/USD:  daily chart shows
.7640 as a congestion area that needs to be breached.  Intra-day support seen at
.7628 and .7592

Open Positions:

Our long in AUD/NZD received
yet another shot in the arm yesterday just as we had anticipated.  It was simply
a matter of time before the rate increases over the last year took their toll on
the New Zealand economy.  On Tuesday, New Zealand Finance Minister Cullen
indicated that rising oil prices and a rising NZD are likely near their peak. 
It is now clear that the RBNZ is uncomfortable with the level of the NZD.  Look
for higher levels and a break through 1.1030 in this pair in the days to come.

We closed out our short in AUD/CAD
yesterday for a small profit after seeing a big technical break on Monday. 
However, it was short lived, and given the reaction to the break lower, it was
prudent to take profits.

Short in EUR/AUD is proving to
be a waiting game with the key 1.6931 level needing to be broken in order for
first price objective of 1.6805 to be reached.

As always, feel free to send me
your comments and questions.


Dave

 

 

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