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Currency Market Notes

Here is a look at where the dollar may be heading amid the latest raft of economic news.

The seven of the eight actual trading sessions of August have been unable to break the high/low trading range set at the end of July, at a time that global markets absorbed four main interest rate statements (U.K., ECB, Japan, U.S.), non-farm payroll numbers, and a raft of macro-economic releases that were mostly all weaker than had been expected.

The current Wednesday trading session is the first one of the month to allow price action to break the August range, and is doing it with Usd buying just as the client notes last week intimated it would.

Tenured traders will now be looking for one last re-cycle against the Usd that sees the major currencies make the last exhaustion move that fails to break resistance, as the final confirmation that weak U.S. data, slow global growth, and poor NFP numbers will not only set the tone for the month as per the pattern since December 2009, but will start to test the solid four-hour price action trend that has held the Usd in reverse gear for the last month.

Asian risk markets are already signaling short on most time-frames, with European markets signaling short if the German Dax (6190) closes under 6150, and the S/P (1105) closes under 1095 this week. Hard commodities are changing their trend, and if WTI (79.30) closes the week under 77.50, the final confirmation will be in place that global growth outlooks, and in particular weak U.S. economics, will empower the Usd as pathetically low global yields offer no reason to pay a risk premium.

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The global reserve status of the dollar will now allow speculators to cash out of recent short-dollar trades, and by default will strengthen the buck. The dollar index (81.70) had a slow and steady decline from 88.50 from the highs hit in June and traders will now be looking for a replication of the May break from 81.50 that allowed a slow and steady move higher.

The May pattern of trade saw the dollar getting bought at the same time that S/P trade was reversing off 1215, in a move that eventually settled just above 1000 at the beginning of July.

The 17.5% drop in equity values in two months was partially reversed with a 7% move higher in July that revealed overall weakness in being unable to get back to yearly highs, and confirmed the accepted norm in the post-credit crisis era of 2% to 3% daily moves on main exchanges, with monthly swings back and forth that swap 7% to 8% values with impunity.

If S/P trade moves under 1095 and holds this week, the major pairs will struggle to gain value against the dollar as the move into a bloated Treasury market gets underway, just at the perfect time for the Federal Reserve to dump the latest swathe of U.S. debt into the hands of those looking for their short-term yield fix.

However, traders will be hesitant to call the move a flight-to-safety because in the current economic business cycle there are few markets that are deemed to be safe. A flight-to-the-crack-joint may suffice, as main dealers line up for their low-value yield-rush administered by the Treasury.

Reliable OTC Markets

Trust in the Exchange floor system is on hiatus, and until it gets back, and until fiscal imbalances are addressed that allows the fog to clear regarding the cost of putting right five years of excess that top off nearly four decades of fiat currency domination, "safe" is a word that will be used sparingly in Exchange floor traded circles.

The most ironic thing in all of this is that the previously derided over the counter (OTC) markets are showing themselves as reliable and structured, in a world of automation domination that has computer coding running the main Exchange floors. OTC currency trade follows the ebbs and flows of the Exchanges, but does not suffer the indignity of blatant computer manipulation that allows automated melt-ups and melt-down on low-volume participation.

Forex Shines

Forex is an integral part of global trade and greases the wheels of regional commerce while carrying global momentum into each session that is hard, if not impossible (if you ask the Bank of England (1992) and Swiss National Bank (2010) among others that tried) to manipulate. Currency trade can be volatile as it reacts to three regional equity trading sessions in each of its daily chart closes, but the global flow of commerce tends to keep things anchored.

With just eight major pairs of note, the ease of which analysis can be made has ever-increasing numbers of managers and traders looking at forex trade as a stand-alone asset class, and rightly so if the Exchange floors continue the embarrassing saga of trying to get algorithm coding back into Pandora's Box.

The only globally trade market that has maintained increasing month-over-month and year-over-year participation levels is currency trade, and in the ten years since the dot com bubble burst, forex has returned consistent trading patterns, and allowed price action to freely unfold.

Compared to the current Exchange patterns of trade, forex is a shining light in a world of global Exchange floor trade that is looking more like the Wild West with every passing day. At a time that global risk and yield markets are fighting each other like rabid dogs over the scraps left from historic mutual fund and managed account redemptions, forex traders will be preparing to hedge the impending drop in portfolio values, and trade in-line with risk if the bi-polar equity markets choose to go the other way.

Buy and hold is dead; long live buy and sell, at least until regional administrations man-up and face the reality that stands in front of them, after allowing the markets to gorge on leveraged debt, and allowing fiat banking to replace the stability of the gold standard. Good luck with the Exchange floor trading arena, OTC forex has never looked so appealing.

Marco Hague is one of the founders and principals of The London Forex Broadsheet (commonly known as TheLFB), a global forex trader portal with headquarters in the U.S. Hague began his career with the Bank of England dealing with foreign exchange control, and he has been trading for the last three decades. He has been involved with institutional risk asset ratio analysis and the implementation and maintenance of institutional trade desks globally.