Well.. here we are, 24 hours after my last blog where I stated that EUR/USD could not correct too much further. I postulated that the low 1.28s would cap the rally, and lo and behold we got to 1.2792 before suffering a severe bout of vertigo, it’s now trading at 1.2670. This is all well and good, but I suspect some Federal Reserve committee members will be looking at the price action following their minutes and scratching their heads! It’s not exactly what they wanted, if you remember, one of their concerns was that weakening economic growth in the Eurozone and China, combined with a strengthening dollar is negative news for economic growth in the US, the domestic economy will need to power forward on its own. I can’t say I have too much sympathy though, the dollar has been cheaper than its long run average for years now, and despite this nascent secular rally it’s probably still lower than the average level since the end of Bretton Woods. It’s time for the greenback to do some of the heavy lifting for the global economy in my view. It’s not going to be easy for them to weaken the dollar, not that they’ll try, there really isn’t a justification anymore.
From a technical perspective, the overbought conditions for most dollar pairs have moved back to neutral levels and there is nothing to stop the bull trend extending, I can quite easily see most of the dollar highs getting taken out before the end of the year, in some cases it could happen as early as next week! But for now, the dollar may not even be the main story in town. US earnings season started this week, and we’ve already seen decent numbers from Alcoa the aluminium giant – there’s nothing stopping strong reported earnings for this last quarter, but it’s the future that matters. I wonder if we’ll start to hear forward guidance raising concerns about dollar strength? It’s possible. Global equities have performed poorly over the last week. I actually think the s&p 500 could go another 2 – 3% lower before this correction is done, I don’t know whether earnings season will be the cause, but in the context of the secular rally we’ve seen since 2009, this is a barely noticeable dip. As with the dollar, so with equities, bull market need corrections to maintain a sustainable trend.
This bearish sentiment in the equity markets is likely to impact currencies. The dollar does well in this environment, but emerging currencies like the South African Rand and Mexican Peso do not. We may well have this dollar bounce stall for a time during the day today, but I could see it gathering pace into the close tonight. At some point we will need to consider the social implications a significant dollar rally will have, particularly on developing economies.
On the data front today we’ve seen more disappointing numbers out of Italy and declining consumer confidence in Japan, apart from that there’s not much of significance, although Canadian employment data might be worth studying when it comes out. It all sounds rather gloomy, but consider that oil prices are now lower than they have been for a few years, this will feed into higher consumer disposal income in the months ahead. It’s not great news for OPEC and Russia, but they’ve benefited from high prices for many many years now, we can only hope they took advantage of their good fortune and used the money wisely. Ok ok.. I don’t really believe that any more than the rest of you…