This text is from blog famous currency strategist Joel Kruger .
AND THERE YA HAVE IT – While I did say markets were looking ripe for reversal on Friday, I also warned against taking action, on the possibility of some capitulation trade resulting in one final surge in currencies against the buck. Still, as per my analysis over the past several weeks, even with this latest surge, nothing has really changed on the technical side. EUR/USD still holds below my key 1.3200 level, and only a weekly close above would delay. Fundamentally, I remain aggressively bullish the US Dollar, and am in no way discouraged with the current price action. At the end of the day, I still see the US Dollar as the most attractive currency for both its current safe haven lure and eventual yield attraction.
See daily forex technical analysis video made by Joel:
PROFESSIONAL RESPONSIBILITY – Moving on, in light of the recent extended US Dollar declines, I would like to take the time to talk a little bit about my book and the very important distinction between my analysis and actual positions. Even though I have been aggressively US Dollar bullish across the board, I have been very strategic with my entries and selective about which currencies I short against the buck. It is of critical importance that it is understood that my USD bullishness has not translated into a blank check short position in EUR/USD over the past several weeks, while the US Dollar has been declining. In fact, I only have taken one EUR/USD position during this period of USD declines. Several days ago I sold EUR/USD at 1.2880 and exited for a loss on a daily close above 1.3000. Since then, I have been sidelined.
OFF TO A GOOD START – Meanwhile, I have just exited a long USD/JPY position from 78.70 for an over 500 point gain. USD/JPY has obviously been a wonderful trade, and one in which I had built up a significantly large position, in light of my extremely bullish views over the past several months. While I remain aggressively bullish USD/JPY over the medium and longer-term, the timing was right to realize profit here (post election). I will now look to re-buy into dips if given the chance. Elsewhere, I am long USD/CAD from 0.9800 (in the money), and short AUD/USD from just over 1.0400 (out of the money). As far as non-USD markets are concerned, I have been holding a EUR/AUD long from around 1.2000 since July (in the money), and I have been profitably in and out of EUR/CHF on the long side. I have also dabbled successfully in some of the more exotic currencies like the rupee and shekel, but these positions are less relevant for this blog. Overall, my first six months of trading have been a blessing and I very much look forward to the next six.
HAWKISH UNDERTONES – Now back to the fundamentals and more on my bullish US Dollar outlook. I have spent a lot of time thinking about the latest Fed monetary policy statement, and the more I think about it, the more I see some peculiar subtleties that actually could even have some hawkish undertones. My thoughts over the weekend centered around the Fed’s decision to put all its eggs in one basket and directly tie its timing for monetary policy reversal to an unemployment rate of 6.5%. Up until this latest decision, the Fed had made it very clear that it would leave rates ultra low through 2014. So why now shift the timing away from a far off date, to something much more tangible in the unemployment rate? The question that kept running through my head was what then was more likely to come first; 2014 or a clear improvement in the unemployment rate, “improvement” being the key word?
MOVING IN THE RIGHT DIRECTION – In my view, we are coming from historically elevated unemployment levels and should only continue to see improvement from here. The US economy is showing clear signs of recovery and therefore, for the US Dollar to rally, all we really need to see is more of a drop in the unemployment rate, which seems quite likely at current levels. Every time the unemployment rate drops from here, markets will further price in the anticipated Fed monetary policy reversal, which in turn, will narrow yield differentials back in favor of the Greenback. The key point here is that for the US Dollar to rally, we don’t need to see 6.5% unemployment, we only need to see a move in the direction of 6.5%. To me, this seems like a very realistic scenario and one that can potentially move the USD higher a lot faster than a policy tied to some time off in the distant future which is also based on a plethora of economic indicators.
FOOD FOR THOUGHT – Let us compare former Fed policy with the updated policy directly tied to unemployment. Now think about a week of US economic data which is bad on the whole, but also shows a drop in the unemployment rate. With previous monetary policy, the US Dollar would potentially be more at risk for declines given the need to consider all of the economic data. However, applying the newly adopted policy, all other data would be rendered effectively meaningless, with only the drop in the unemployment rate being considered as a gauge for monetary policy reversal, and by extension, US Dollar strength (on the anticipated narrowing in yield differentials).