Wednesday, September 21, 2011

How to trade US Dollar after FOMC

Many TV heads will be screaming tomorrow how Bernanke is killing the dollar. While it is true that previous QE has weakened the dollar, I think that unless Fed does anything unexpected tomorrow (like QE3 or major change of statement language), dollar weakness will be temporary post-FOMC, perhaps less than 24 hrs.
So let's tune out the noise and look at my technical and fundamental basis for dollar's bullish case:

1. Dollar index has been consolidating above 200 dsma. Chart has bottomed, at least on short-term basis. All those calling for continued secular bear are going to have to wait for this cyclical bull correction to play out first, long way to go in it still.
2. DXY basket is full of weak currencies at the moment. Euro, cable, loonie, swissy, and krona have all been declining against the buck lately, with exception of lone dissenter - yen.
a) Euro: LOL, can there be a weaker currency now? Well-known problems are weighing it down. This is 57% of the DXY practically going to hell in a handbasket (no pun intended).
b) Cable: economy is continuing to be in a dumpster due to austerity and banking sector's woes, stagflation is causing riots, more QE is around the corner, there was even a rumor today about some more stimulus (unconfirmed).
c) Loonie: slowing oil and gas industry with weaker exports to US (largest trade partner), waning demand for commodities in emerging countries, slower growth and lower inflation in the last few months reduced the need for a rate hike.
d) Swissy: peg to euro will keep it grounded (what a poor choice to peg to deteriorating currency), SNB selling CHF against the dollar as a result.
e) Krona: pretty much does the same thing euro does lately, not sure anyone pays attention :)
f) Yen: risk-aversion currency of choice at the moment (absent CHF), no need to stress about anything fundamental, fear trade... So 13% of index is kind of stagnant due to this, with BOJ lurking at every opportunity to counter the specs.
3. Speaking of risk aversion, dollar will benefit, as equities around the world are selling off into a bear market. There is no better liquid heaven to run to than the dollar in this scenario.
4. Commodities are extremely weak. All metals (except for gold) are selling off big. Just look at copper, WOW! - what a great indicator of more weakness in stock markets still to come. Dr. Copper is now breaking down, and looks extremely bearish.
5. Fiscal austerity here in US is in order. All those dollar bears, who were ready for a huge dollar downdraft due to Obamacare, are now faced with proposed $3T deficit reduction by the same President instead.
6. While the long-term interest rates in US are declining, they are not that much better in DXY components' countries, due to their economies slowing down. It will be just a matter of time before central banks there reduce them further (ECB in particular), thus closing the spread with our rates, and making it less attractive for currency carry.

All of the above will help the dollar going forward. I expect this bull run to continue for some time. It will do serious damage to commodities, equities, and risk currencies.
I will be looking to buy the dollar post-FOMC in the case of no unexpected QE3 announcement.

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