Grappling with the Greenback: Foreign Currencies Gain MomentumPosted 10/17/2019 9:35AM CT |
U.S. dollar futures broke a valid trendline below 98.50 this week and continue to sell off. The slide lower comes on the heels of Powell’s announcement, saying the Fed would inject massive amount of liquidity into the U.S. economy via treasury buybacks from November through April. Thursday morning, the dollar is off its overnight lows, but encountering resistance near 97.50 and sliding lower. Technically speaking, the dollar is encountering a “trifecta of overlapping cycle downturns”. Essentially, major trends and minor trends are all running out of steam, and the fundamentals paint the same picture. However, I do believe the dollar will fight to hold near the 97 level. Dollar demand is not going anywhere. Should the Fed’s easing of monetary policy reignite the slowing economy, the gap between the dollar and foreign currencies is likely to narrow, but the greenback will remain the most fluid and accepted currency in the world. Should Fed policy fail to stimulate the economy, foreign nations will likely struggle more quickly and more intensely than the U.S., providing safe-haven buying interest in the USD. So, the dollar is breaking down due to increasing money supply in the short term, but inevitably, I still believe the dollar will remain strong due to the resilience of the U.S. economy and its strong global demand. As the dollar breaks now, other world currencies move higher. Specifically, the British pound and the commodity currencies are doing well.
Fundamentally, investors in the pound are drafting confidence on the progress of Brexit. There is a deal in place, but it still needs to move through Parliament, and without the support of the Northern Irish DUP, there is still risk of failure. Should the bill be passed, I strongly believe we’ll see the pound rocket higher. The euro is catching a “win-by-default” bid as the dollar breaks down, while the safe-haven yen remains in a firm downtrend (so long as uncertainty is subdued). The Canadian dollar looks to test resistance at 76.25, and a close above that level will test a run to 77. In short, currencies are looking to reverse trend, but all action is tied to the movement of the USD.