USD Update - March 16, 2011

Currently post US FOMC announcement USD has been range bound. Currently on the border deciding between risk on and risk off. A reflection of this period of uncertainty between natural disasters, EU integration/sovereign debt issues, US growth, along with slowing Asian growth and renewed fears of inflation.

The short term play from last weak into this week seemed to be risk on. Evidenced with Monday and Tuesday's one, three and six month bill auctions showed strong demand for short term bills (see kink in yield curve). TIC data showed decreases in longer term securities though with an increase in shorter term securities, however note this is lagged data, the yield curve is already starting reflect the recent current event crisis effects.

Despite short term risk, longer term expectations seems to be inflation oriented. 

USD Short Term Bearish Technical View:

The reason why the USD index hit support around 76.33 with the big recent drop from the beginning of March can be explained above. The short term bearish view is the above explanations are short term effects in the longer down trend.


Bearish evidence:

Daily 6 Month

• Fundamental strength seems to be lacking for a full out sustained oversold USD (similar to end of 2008) via RSI; however in the short term RSI action shows room to fall further
• Long term and Short Term trend price pressure to the downside
• Short term candle shows a failing of bulls at short term support
• Longer Term MACD studies will show downward momentum can fall much lower below current levels. 

Bearish Move Targets:

3 Year Weekly

• Short term and Long term picture are in agreement
• Given the current economic fundamentals a move to 72 is unlikely in the short term, though a break below short term support and lead to price moves between 74 and 75 easily. 

Longer Term Trends (USD safe haven):

• 2008 USD strong flight to quality trend with risk appetite decreasing, then increasing again as the crisis unwinds significantly going into 2009
• Towards the end where I start indicating, risk appetite decreases with the European Sovereign debt crisis as capital flows to the dollar safe haven.
• By Mid 2010 people got bored with the sovereign debt crisis where risk appetite increased and QE2 Mania was overly rampant causing huge speculation in dollar weakness and better US growth forecast.
• We had an interesting hiccup in the increased risk appetite trend towards the end of 2010 as short term Amnesia wore off and everyone remembered NOTHING changed in Europe (essentially people got board of the QE2 story and needed another excuse to drive markets).
• Entering 2011 we resumed the increased risk appetite trend from mid 2010 and currently hit a wall of uncertainty (current short term support)

Two scenarios to play out:

1. All hell breaks out; Europe implodes and US produces a series of poor economic report and more natural disasters/geopolitical risk occur or plays out causing a big run up on risk on again 
2. MENA settles down, Europe manages to make snail pace progress politically/economically, US produces moderate economic reports; the world continues recovery mode from the past two months of volatility. 

Conclusion:

Though I exaggerate the first scenario there is a risk that the MENA region continues with instability, while the EU fails to instill confidence. However, I tend to favor the more moderate view of scenario two with priced in expectations of the US economy (seen by the FOMC decision yesterday), and the MENA and EU story taking a backseat as events simmer down (media/investors/traders get bored easily after awhile). If the EU can manage expectations economic fundamentals should pull through with high inflation expectations and speculation of interest rates. This should help push the dollar down in the short term. If Q2 2011 does see moves in rates in the EU region, this perhaps might be a strong enough catalyst to USD index to 72. If one takes a moderate view though we can expect short term support to break and see the dollar index fall further. to 74.