This text is from blog famous currency strategist Joel Kruger .
MORE DOVISH THAN EVER – So what was USD bullish about the Fed yesterday? Absolutely nothing. In fact, it was probably the most dovish monetary policy statement I have ever seen. So why am I still USD bullish? Was it the post Fed announcement Bernanke press conference that revealed some hawkishness from the central banker in the Q&A? Nope. He was just as dovish there as well. On the surface, there is absolutely no reason to be buying US Dollars after a policy decision like that. The Fed has every intention to continue pumping liquidity into the system, while at the same time keeping rates ultra low for a very long time.
See daily forex technicaL analysis video made by Joel:
THE INFLATION CUSHION – In fact, no change to rate policy will be seen until the unemployment rate drops back below 6.5%, and even then, the Fed has made it clear that a reversal of policy does not necessarily need to be aggressive. But what about the inflation variable? If inflation starts to rise, won’t it pressure the Fed to raise rates? Well…no problem there as well. The Fed has decided to build in a very large inflation cushion, so as not to be backed into a corner and pressured into higher rates. So on the surface, absolutely no reason to be buying the buck, and every reason to want to be selling the US Dollar aggressively right? Well as crazy as this might sound, I am even more USD bullish than ever.
THE REAL QUESTION – Ok..what’s going on Joel? Are you loco? Well…maybe…but the way I see it is like this. The Fed has done a marvelous job throughout the global turmoil of being able to gauge the magnitude of the economic crisis, wasting no time, and aggressively employing a strategy of whatever it takes monetary policy accommodation in order to nurse the US economy back to health. Meanwhile, other central banks have been much slower to react with similar necessary policy implementations. So if the Fed remains committed to such an aggressive dovish policy stance, then the real question is WHY?
MISINTERPRETATION – Clearly these aggressive measures are being put in place for a reason, and the reason is certainly not one which justifies a wave of risk on trade and rush of optimism. To me, the message is clear. This global economy is still far from out of the woods and monetary policy still needs to be “artificially” loose for that reason. The free money, attractive valuations, let’s buy into risk reaction post Fed decisions is absurd, and investors should be much more aware of this fact.
MULTIPLE CHOICE – Simply put, if you were taking an economics exam and one of the questions read….”A central bank implements super aggressive and unprecedented alternative forms of monetary policy accommodation. Does this mean A) the economy is prospering b) the economy is in trouble c) the economy is in big trouble…run for the hills.” I think answer C is probably the right choice. And yet, risk correlated assets remain well bid, with US equities getting closer and closer to pre-crisis record levels!! While it is true that this type of policy widens interest rate differentials out of the US Dollar’s favor and begs investors to use the buck as a funding currency for higher yielding alternatives, it is also true that the US economy is at the center of it all, and likely acts as a leading indicator for what lies ahead for other economies around the world. It therefore stands to reason that if things are still not so great in the US, they should also not be so great abroad.
A HEALTHY REMINDER – Investors need to be reminded that aggressive monetary easing creates attractive incentives to invest, but these incentives are more a product of the easing itself rather than a reflection of a healthy economy. If this is so, then it would makes sense that what drives markets right now should be much less yield differential focused and more flight to safety intensive. From a currency perspective, the safest place to be is in the US Dollar and the negative yield differential should be more appropriately interpreted as a welcome premium for the safety of the investment in the buck. Moreover, if the US economy was the first into this global crisis, it should then be the first to emerge from the depths of despair. And when it does, mark my words, interest differentials will then finally become critically important, as the Fed starts to aggressively reverse monetary policy, and yields narrow markedly back in favor of the Greenback.
WHAT ABOUT THE CHARTS JOEL? – Technicals for me have actually been a huge comfort throughout. Despite this latest round of US Dollar selling, there really has been no change to the larger picture. The Euro still remains locked in a multi-week consolidation within a broader medium-term downtrend, while the commodity bloc currencies still show the formation of longer-term cyclical tops against the US Dollar. EUR/USD should hold below 1.3200 on a weekly close basis, AUD/USD below 1.0700 on a weekly close basis, NZD/USD below 0.8600 on a weekly close basis, and USD/CAD above 0.9700 on weekly close basis. So long as these markets adhere to the above, the outlook remains highly US Dollar constructive, with the current bout of USD selling classed as a corrective move which should actually present attractive position building opportunities.
PARTING WORDS – Remember, whenever it looks like all hope is lost and there is no longer any reason to want to be invested, to the point where you have been fully liquidated and actually want to consider taking the other side, the market will tease you to madness and prove you right….when at that point it is no longer of consequence and in fact you only want to be proven wrong.
