Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Zero Interest Rate Bound Fed Breaks U.S. Dollar

Currencies / US Dollar Dec 16, 2008 - 08:28 PM GMT

By: Ashraf_Laidi

Currencies Best Financial Markets Analysis ArticleThe Fed's shift towards a range of 0-0.25% in its fed funds target zero intensifies the yield assault to the dollar, leaving little chance for traders but to extend speculative and directional offers in the currency. The decision prompts the biggest 2-day rallly in EURUSD (4.8%) following last week's 5.1% jump. The dollar is unlikely to immediately descend into an uncontrollable decline as the easing campaigns of overseas central bankers and secular market volatility has yet to recapture its peak. But the longer term prospects ahead appear particularly ominous for the world's reserve currency once global economic stability starts to buildup and the demand/supply schedule of commodities further moves towards the price.


Why the Dollar Does not Follow its Low-Yielding Counterpart --the yen?

1. The structural imbalance situation continues to favor Japan over the US, with Japans current account surplus at 3.8% of GDP versus a deficit of 4.6% of GDP in the US. Both countries have a budget deficit, but Japans 4% of GDP is less than the US 5.5%. Japans superior current account balance means the nations position as a major provider of global capital allows a natural return of capital back to Japan during rising economic and market uncertainty. (The same rational helps explain the pounds damage as UKs fiscal deficit breaks above 4.0% of GDP in 2009 after jumping to 3.5% in 2008 from 2.7% in 2007).

In contrast, the US position as a major borrower of capital increases the riskiness of keeping money in the US despite dollars low yielding status, which served as a positive during risk aversion. In otherwords, the combination of ultra low interest rates and structural imbalances offers a worst case scenario for the US currency.

2. Elevated concerns about inflationary implications of the Treasurys swelling balance sheet to $2.25 trln increases the quantity of money, prompting a secular decline against commodities, hence, golds rebound to 2-month highs.

3. Lurking threat of Big 3s bankruptcy and its impact on overall US economy. The auto industry's overall contribution to GDP is about 4%, with 12 billion annual spent on research and development. It also employs over 240K direct workers and 5 million indirect workers, as well as provides healthcare for 2 million employees.

4. OPECs insistence to protect oil prices along with 1.9-2.1 million barrels per day rather than the expected 1.5 mln bpd. Russia's participation to cut output is expected as the need to stem the rubles sell-off will be helped by supporting oil prices. The oil-dollar impact will favor the fuel over the currency. I warned to clients yesterday that part of OPEC's decision will be impacted by the Fed's decision. Today's zero % announcement may not prevent OPEC from cutting more than 2 million bpd.

For a practical and comprehensive guide on the functioning of global structural imbalances and currencies, chapter 7 U.S. Imbalances, FX Reserve Diversification, and the U.S. Dollar of my book details the topic (pages 161-189).

With USDJPY breaching below 90 yen, 2 yen above last weeks 13-year lows and the rest of the yen crosses (EURJPY and GBPJPY) rising, the dollar impact shows emerges despite improved risk aversion. EURUSD breaches our year-end target of $1.37 and testing above a major resistance of $1.3750--the 38% retracement of the decline from the $1.6038 record high to the $1.2328 low. $1.3880 acts as the next obstacle. GBPUSD faces interim resistance at $1.55, a breach of which seen extending to as high $1.57.

AUDJPY daily chart may seen regaining the trend line resistance at 62.25 extending from Nov 25 and the bigger trend line resistance of near 62.50 extending from Oct 2007. With AUDJPY currently standing at 60.40, there is ample room for a 2 yen rebound. A 75-bp Fed cut comprises a major catalyst to empowering JPY crosses such as AUDJPY, while a 50-bp cut may also help risk appetite in the event of explicit FOMC statement asserting willingness to extend persistent liquidity to credit markets. Similar argument seen boosting AUDUSD (69.65), NZDUSD (58.30) and bearish for USDCAD (1.2010).

By Ashraf Laidi
CMC Markets NA
AshrafLaidi.com

Ashraf Laidi is the Chief FX Analyst at CMC Markets NA. This publication is intended to be used for information purposes only and does not constitute investment advice. CMC Markets (US) LLC is registered as a Futures Commission Merchant with the Commodity Futures Trading Commission and is a member of the National Futures Association.

Ashraf Laidi Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in