It shows the euro/dollar has been flirting with the $1.49/1.50 barrier for the third time since late November. Since hitting $1.49 on Nov. 23, the euro tested that level on Jan. 15 and most recently on Feb. 1. Will the third time be the charm for a move to $1.50?
“I’m not impressed with euro/dollar trade above $1.49,” Coleman says. “It is not able to hold those levels.”
Coleman points to the presence of heavy barrier options at the $1.50 level.
“When there are barrier options clustered at a particular level, it is usually a range trading sort of structure,” he says.
Coleman also notes the psychological significance of the $1.50 number.
“It is one of the big round numbers — markets love them,” he says. “They tend to have a magnetic effect on price.”
However, he says there is a lot of two-way action around big, round numbers. Near term, Coleman sees the potential for a quick rally through the $1.50 barrier, but he does not expect it to be long lasting. His advice: Take profits on the approach of $1.50.
“I fade the deflation idea,” says Jim Glassman, senior economist at JP Morgan Chase. “What we are really asking is — is the economy going to be so dysfunctional and stuck in a subpar rut that prices just keep going lower? Most people would not agree we will see unemployment go to 25 percent and that we will get stuck there.
“The economy is very flexible and the policy responses have been quite assertive. We’ve learned the lessons from the 1930s and aren’t going to let that happen. If these programs don’t work and the economy continues to flounder, we are just going to get more [government stimulus].”
Glassman says the more unemployment rises, the more action the government will take.
Basile agrees the theme for the year ahead will be “private sector deleveraging and the public sector leveraging — and growth comes from the public sector.
” Pressler feels the only sector that will create jobs is the public sector.
“[However], in a capitalist society, it should be a rare time when that happens,” he says. “Normally, government has no business doing business. But the private sector is cutting back. Credit isn’t being generated. The government will gladly go into debt to make sure things don’t go catastrophic, but it’s just a stop-gap measure.”
The falling dollar harms consumers of imports and imperils the U.S. reserve currency status, but unless something new and horrible comes along, we can see the general outline of developments. It’s not the kind of mindless panic that gets its grip on stock markets from time to time — the dollar’s decline is actually quite orderly. So what if the dollar goes to 1.50 or 1.55? At some point the euro will be overvalued, if it’s not already, and the pendulum will swing back in the dollar’s favor.
Also, at some point, as the euro will become a second reserve currency, Europe will start having regrets about being the issuer of a reserve currency — specifically, wild swings in money supply as users of the currency as a transaction medium and as a store of value change course. This is what happened to the dollar in the early 1980s as “petrodollars” came swarming in and out, rendering money supply practically useless as an inflation-management tool. European fixed-income markets in particular are not yet fully mature.
So, we observe the trend and we can easily understand the reasons for it, but we shouldn’t imagine it will go on forever. In the end, U.S. institutional robustness, transparency, variety, liquidity, and sheer size will reassert their attractiveness to global investors. But first we have to suffer through a period of revulsion lasting perhaps two to three more years, barring a global crisis.
It won’t be a one way street. As we are seeing, on the road to 1.45 and 1.50, sizeable corrections will still occur. Betting against the dollar wholesale is not a wise bet. And if a global crisis arises, e.g., the Shanghai index melting down, the dollar and U.S. capital markets will again be a safehaven.
Everything you know is wrong, and the global exchange rate system is based on a false premise. Now that we have those housekeeping chores out of the way, let’s dig a little deeper into the data and address the second part of the statement, the one dealing with currencies.
A lot deeper, actually: In this, the first of a two-part discussion on the link between currencies and the Federal Reserve’s trade weights, we review the methodology and terms used to analyze this relationship and focus on the “major” currencies and their trade weights. Next month will feature a discussion of the “minor” currencies and their trade weights.
It is quite likely that there will be a problem initially with recognizing the different opportunities, but once you get used to it, the trading process should become routine.
Most importantly, working with clearly defined stop-loss and profit targets based on recent price behavior provides a solid footing for placing trades.
As market conditions can shift rapidly in the exotic currency environment, strategists advise retail customers to monitor and limit position sizes carefully.
“Exotic currencies can become very volatile and illiquid without warning,” Jamgotch says.
For example, he pointed to when the Thai baht fell more than four percent against the U.S. dollar in December 2006 when the Bank of Thailand imposed penalties on investments held for less than a year. Spreads on the U.S. dollar/ Thai baht cross spiked from 5 pips to 100 or more, depending on the institution. Jamgotch says many market makers chose not to offer Thai baht crosses during this turbulent time.
Exotic currency traders also have to face the reality that it may be difficult to exit positions because of lack of liquidity outside of local trading hours.
“At the end of the day, it is almost like a futures market position, when the futures close at 2 o’clock and you can’t get out until the next day,” warns Forex.com’s Dolan. For example, he notes that outside of North American trading hours, liquidity is “pretty poor” in the Mexican peso.
“Whatever you do, put on small trades,” suggests Oanda co-founder Olsen.