The FOMC and the Dollar

I have had a few questions about what the strategy should be based on the statement on Wednesday. Some wondered whether the more positive tone would lead to higher rates and therefore continue the process of the carry trade unwinding and be Dollar positive. Whilst that is a distinct possibility it is not due to higher rate expectations as both the T Bond market and the short end of the curve rallied strongly on Thursday. It appears that the market perceives that the recovery is still too slow.

In fact, in contrast to the unemployment report which was so surprising it caused a news event to overwhelm the Dollars outlook, the recent strength I think is purely technical in nature. This has two basic facets. The first is the corporate repatriation of Dollars from overseas as we approach year end.

The second is due to the technical analysis based outlook. My commentaries have been showing that the Dollar has been building a base for some time now, but Thursday saw a key change as the Eurodollar, Swiss Franc, Yen and Canadian all switched their major trend on Thursday. The Pound and Aussie had already down so. I define a major trend change by the movement from one distribution into another. This means that what was perceived as fair value has shifted significantly and this has now occurred across the board. Adding to the momentum is the fact that traditional indicators such as the Rsi and Stochastic are showing overbought reading which encourages top pickers, who are then forced out as the Dollar makes fresh highs. On my measurements the Dollar is still far from overbought.

So what should you look for? The key will be the ability to stay in these new distributions or trends. This means 1.4515 on Eurodollar and 1.0340 on the Swiss need to hold any correction on a closing basis.

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