Has The Dollar Completed It's Correction?


Has The Dollar Completed It's Correction?


Asian Morning Update

No fireworks overnight but then none was expected. There were limited releases on show but a few comments to absorb.

U.K. continued the un-astounding trade balances with August numbers pretty much as forecast. The visible deficit was about as forecast at GBP -6.85 bn as was the total deficit at GBP 4.11 bn. The August numbers represented a narrowing of the deficit but these were offset by upward revisions to the July numbers so net-net there wasn't much joy - or discontent and overall neutral for the Pound.

On the positive side, following the rather gloomy numbers that have been emanating from Europe's largest economy, the German industrial production numbers were much stronger than expected in August. The rise of +1.7% MoM and +5.1% YoY were cleanly well above the forecasts of +0.5% and +3.9% respectively. Manufacturing was up by +1.8% MoM and construction by +2.0% MoM. There is obviously life in the old dog yet and maybe it is too soon to write off Germany after 2 months disappointments. Still, the overall downtrend in the economy is in place but perhaps we need to wait for further signs.

No economic releases from the States and only the FOMC minutes from September 18th which showed a unanimous decision to cut rates by 0.5%. The statement read: 'In order to help forestall some of the adverse effects on the economy that might otherwise arise, all members agreed that a rate cut of 50 basis points at this meeting was the most prudent course of action.'

The move was clearly aimed at lowering benchmark overnight borrowing costs could help offset the effect of tighter financial economic conditions on the economy. The risk of not doing so was considered to be a tightening credit conditions and a deepening housing slump. The members were mindful of the chance that a spike in mortgage foreclosures would lead to 'significant weakness' in business activity and hiring. On inflation the committee felt that the upside risks have eased somewhat.

Of course, with G7 coming up next week the question of FX levels was on the tips of officials tongues. From Trichet was his new catchphrase 'The exchange rate is a very important question and a question where we have to be as disciplined as possible when we are speaking publicly.' He re-iterated that 'As for exchange rates, once again: I'm in charge. Exchange rates should reflect economic fundamentals, and ... excess volatility and disorderly movements in exchange rates are undesirable for economic growth.' He also warned investors against one-way bets on continued yen weakness, noting that the Japanese economy was recovering sustainably from a malaise which lasted more than a decade. He doesn't know much about the problems that Japan faces over the coming decades which is putting off both investors and the consumer.

The German Finance minister was less direct, commenting that he prefers a strong Euro, a strong Dollar, a strong Yen and a strong Yuan. (Make a trade out of that one...) However, he did make one statement that is very true, 'current FX moves are not exceptional compared with past FX moves.' Indeed, current markets, compared to when I first joined the FX market 25 years ago are exceptionally tame.

And finally a comment from the St Louis Fed's Poole who considers forecasting the Dollar's FX value as 'idle speculation' and the 'Dollar's drop is no explicable.' I'm not sure what planet he is from but as for the Dollar's decline he should perhaps ask sovereign heads in Qatar and others who are balancing their FX reserves. As for forecasting, well, I'm an analyst and know that it can be done having forecast the timing and approximate value of the low in Dollar-Yen months in advance...

After some further strength in the Dollar early in Asia yesterday the rest of the day saw a reversal. Without having studied the moves it does look as these are deep enough to suggest we may have seen the end of the Dollar correction. I'll need to look at this during my morning analysis but what I am confident of is that the greater risk is now back on the downside. The bigger question to me is whether this will mean a resumption of the downtrend or whether it'll cause some further consolidation for 2-4 weeks is uncertain.

Central to my analysis is the fact that Dollar cycles are bearish against Europe for the next 2-3 months. The targets are at 1.47-1.48 Euro and 1.1285 Swissie. I reserve judgment on the Pound with 2.0593 still an important barrier. This timing issue is the biggest conflict to overcome since a direct resumption of the downtrend would risk seeing target a lot earlier than the end of the year so at some point there has to be a consolidation of some sort...

As for today, we have to accept that the market is in a state of suspension. The Dollar correction is either complete or soon will be. Underlying sentiment is bearish Dollars but caged by the risk of a G7 statement that will mean the risks are too much to get too bearish too quickly.

However, the other side of the coin is just as valid. The chances of a definitive statement from G7 threatening concerted action are very low, if not impossible. There are some older heads who will know that past intervention has had only fleeting impact and whether the European officials like it or not, the market does not have a unified thought process. It is too large, cannot be manipulated and certainly there will always be those with counter-views. From that perspective the comments from Trichet about FX rates and fundamentals is totally irrelevant. A market is there to find the equilibrium at which different parties are willing to exchange currencies.

Therefore the market will not get too bullish dollar either. The end result is likely to be another 8 days of choppy and erratic trading within a range and in the larger scheme of things we have been testing the top end of the Dollar's range over the past few days and thus I feel the larger risk is now lower again.

Let me check this out and report back later...

More later when the analysis is complete.

The following economic releases are due today from Asia.

Australian August Home Loans +1.1%
Australian August Investment Lending
Australian October Westpac Consumer Confidence

Japanese September Machine Tool Orders (YoY)

The Bank of Japan starts its 2-day monetary policy meeting

By: Ian Copsey
Global Forex Trading



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