Trading The Dollar? Here’s What I’m Thinking

• June 6, 2005
• Dave Floyd

Weekly FX Insight — June 4, 2005

 

 

In last weeks report we indicated that the dollar’s
current leg higher was for real and that the typical arguments for dollar
weakness, while valid, were simply not applicable at the present time.  The NFP
(non-farm payrolls) report on Friday, which was disappointing and initially
dragged the dollar towards 87.40, ultimately had no negative impact as the
dollar finished above the overnight highs to close at 88.04.  Price action on
the heels of a key report tells volumes about the overall technical health of
the security in question, in this case the dollar would appear to have further
to run. 

 

The reasons for a firm dollar are readily evident,
from a macro viewpoint:

 

-  interest rates are rising in the US relative to
other countries where rates are on hold and/or set to be lowered (i.e. Europe
and Great Britain)

 

-  the US is creating jobs at a much faster
pace than that of Europe and many other nations

 

-  there is evidence that the current account
deficit will contract over the near-term

 

Technically, we can also see some merits for
further price appreciation

 

 

Subscribers to our FX Insight Service
will know that despite this leg higher in the dollar we have been reluctant to
“position” to the long-side of the dollar and have been more content to simply
swing trade the four pairs we follow, GBP, NZD, AUD and NOK against the dollar. 
Our longer-term trades will typically revolve around pair or crosses that have
less of a correlation to the dollar, thus reducing volatility.  Our current and
recent positions in AUD/CAD and EUR/GBP reflect that approach.

 

Our recent long entry in EUR/GBP is more of a macro
play although technically the cross is oversold.  Our primary reasons for this
new trade are as follows:

 

-  the recent rout in the Euro due to the 2 “no”
votes in France and the Netherlands is a bit overdone and will not likely lead
to the demise of the Euro going forward, we see a near-term bounce as highly
likely

 

-  manufacturing activity in the UK is rapidly
declining relative to the Euro-zone

 

-  the UK Purchasing Managers Index is also moving
lower as are export orders

 

-  property price inflation in the UK is slowing
and showing signs of declining.  This would be a negative for consumer
sentiment, further exacerbating the above mentioned bullet points.

 

 

Performance Update:

 

We feel that our decision back at the end of April
to limit our daily coverage for swing trades to only 4 pairs has provided far
more robust and accurate commentary and trade alerts on a daily basis.  We will
continue to offer longer-term trade ideas from a pool of 20 or so pairs and
crosses.

 

May Service Performance:          340 pips

 

June has got off to a solid start too as our recent
run of good timing in USD/NOK and the successful closing of our short in AUD/CAD
has given us a nice cushion for the month ahead.

 

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

 

Dave