We are at a crossroads.
As I write this, it is the first week of 2010. The new year always brings a certain amount of optimism, although if you think about it: Time is a man-made phenomenon. Nature and/or the universe, does not care if we call it “January”, or “June”. It just is.
Ironically, most people spend the first week or two of a new year thinking about how “different” it is going to be. But that quickly fades, as we realize that the flipping of a calendar page doesn’t change the constants of life. Work is still there to be done. Kids are still needing clothes and the newest fads. Life goes on, and the ho-hum of the daily grind continues shortly. This is a very interesting parallel to where the markets are right now.
As some of the charts show, the USD is gaining in strength, or at least showing some signs of it against almost all currencies at the moment. On January 8th, we will have a pivotal moment in the Dollar’s future in the form of the Non-Farm Payroll Report. Current “guesstimates” range from -10,000 to 0. This brings up several possible scenarios regarding the Dollar.
Traditionally, the USD gets pummeled with good news. This Friday could be different though, as we are also looking at the future of interest rates. If we get a surprise to the upside like we did in December, it could signal a strong move up in the USD against many currencies. The Euro and the Yen are two currencies that are likely to lose drastically to the USD. One must also keep in mind that the Bank Of Japan would hardly be worried about Yen depreciation. In fact, they would welcome it. The European Central Bank would also welcome a little Dollar strength, as Europe has several issues with sovereign debt in places like Greece and Ireland.
Ironically, the USD could be set for a rise either way. A lot of the time, traders will buy US Treasuries in times of shock and danger. A huge drop in NFP could start a run for “safety”. We could see a EUR/USD drop in this situation as well. I would expect the Yen would actually strengthen in this situation though.
Either way, the combination of being oversold, and the likely unwinding of the “Dollar Carry Trade” will more than likely strengthen the USD for a while. The world has been borrowing in USD and buying in other currencies. With the chance of the Federal Reserve raising rates due to jobs being gained in the USA, that interest rate differential will evaporate. Just like profits by borrowing USD and playing the interest rate differences.
No trackbacks yet.