Monday, September 15, 2014

Dollar Appreciation: US Strength, or Weakness Abroad?

I’ve been watching the behavior of the dollar index via the futures contract (/DX) particularly close over the past few weeks. As an economist, I’ve been preaching the testament of the long dollar trade for some time now, and I continue to believe in that overall macro trend. However, as a trader I was caught off guard by the conviction of the dollar with regards to is most recent bout of appreciation.

Looking at the index in several different time frames, there were both weekly and monthly trendlines looking back five years and ten years respectively, that the price was interacting with simultaneously. When this happens, my trader instincts tell me the price should at least consolidate before choosing to either continue higher, or retrace lower. In this instance, nothing. Not even a pause.

First thing’s first, I rebalanced my currency portfolio to reflect the robustness of the breakout. Then I set about deconstructing the reasoning behind this particular show of confidence by market participates in the dollar.

Since I last checked, (talk to a part time worker) the economic environment in the US has not been improving at any measurably increasing rate. Financial and economic statistics have been streaming in, and at this point no alarm bells have been sounded in either direction for growth forecasts. Still the same slow growth in GDP, still the same little-to-no wage growth, still the same low inflation expectations. Overall, things are just still.

So if the dollar’s appreciation does not seem justifiable with the environment in the US, then it lends to logic that it may be from [perceived] weakness abroad. Also lending to the idea of weakness abroad, is the recent [two week] trend of the 10-year Treasury rate measured by the futures contract (/ZN). Borrowing costs for the US government has been trending lower, which indicates to me that investment capital might be seeking a safe haven in US government debt, and not necessarily seeking higher yields.

Granted economic statistics are backward facing, I am now more astute to data releases that reflect a changing or even negative sentiment in foreign markets. Over time, and usually not with too much of a delay, the statistics tend to reflect the international flows of speculative capital, as the ebbs and flows of money change the fundamentals on the ground.

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