Here’s How I’m Adjusting My Trading Because of The Dollar
Why
was today different than all previous days? The logical and simple
answer is that the dollar stopped its declining ways and stayed a sustained
rally. As noted in yesterday’s column, the currency rally felt strained as the
Swiss Franc and Gold appeared tired and struggling. The reversal day on
Tuesday in Gold possibly provided the short-term signal that indeed the rampant
rally in the currencies needed to consolidate. A more important key to an
interim top would be if the Euro Currency closes lower on the week, after all
the chatter concerning the speech of Fed Governor Bernanke. If by Friday’s
close the cash Euro Currency is trading before 125.50, the longs in this market
will have their first period of stress in a day long while.
The continuing strength in the
10-year note helped the dollar rally today. As I have previously discussed, the
long end of the yield curve is going to signal whether the dollar is going to
come under extreme pressure or it will stabilize in the present range. Central
Bank intervention will result in some upward pressure on treasury futures
but that an imminent dollar drop would result in 10-year notes being sold off as
foreign buying ceased. The 10-year is still range-bound and the unemployment
number will hopefully give us the needed test.
Before we get through Friday,
we have to come through the two Central Bank meetings tomorrow. The Bank of
England (MPC–Monetary Policy Committee) will announce their interest rate
decision early Thursday, as will the ECB (European Central Bank). Both banks
are expected to remain on hold as they wait for further confirmation of global
conditions. If there is to be a surprise, it would be for the Bank of England
to raise rates to dampen the increased credit demand in Britain. However, with
the British Pound very strong, I doubt that the MPC would want to provide more
fuel to the sterling rally. The Europeans, under the guiding hand of Chairman
Trichet, will stay the course to save their ammunition to stem a more dramatic
rise in the Euro Currency.
As traders, we must learn to
adjust to changing market conditions. Wednesday’s trading session revealed how
important it is to be aware of all market machinations. Adjusting is extremely
important to survive in markets. For the last month, the dollar headed lower
against all the major currencies–although the yen was difficult and slow due to
constant intervention. When the market changes, people are going to have to be
aware of the cross-rates. The chatter will be the selling of one currency
against another without a dollar component. You may want to buy a high-yield
currency like the Aussie Dollar, while selling a low-yield currency like the
Swiss Franc. When markets settle into a range, the emphasis will shift to
maximizing return by earning the interest differential. I don’t believe that we
are at that point yet but as a technician if you char the cross-rate patterns,
you will be able to ascertain this. Currency cross-rates will be consistently
reviewed in this column as I believe this offers great trading opportunity to
the well-informed.
Now let’s plan for Friday when
the unemployment number is released. The consensus seems to be 150,000 non-farm
payroll number. This number is market neutral and will not disrupt the trend by
itself. The more interesting number will be the manufacturing jobs, for this
has been the number that has been the sore spot on the employment front. When
the Fed Governors talk about the “output gap” and excess capacity, it is the
manufacturing that they are alluding to. This number has been on the decline
for about 18 months; so a positive manufacturing number may, in fact, get the
dollar to rally. Be patient because we will need to see if the Euro Currency
can hold last Friday’s settlement. That will be the key to currency direction
on Friday Afternoon and the following week. Patience and discipline are the
watch words once you have a plan of attack.
Stay Focused—Yra Harris