Gauging the Turn in Dollar, Gold & Oil
The FOMC announcements of March 18, Dec. 16 and Sept. 16 each produced an interventionist surprise at the expense of the dollar. But unlike in the announcements of Sept. 16 (AIG bailout) and Dec. 16 (Fed's zero interest rate target), Wednesday's announcement to buy long term Treasuries and expand the purchase of MBS and Agency securities may continue to extend the dollar’s retreat, beyond just a few days. My warning for a turn in the dollar emerged shortly after the dollar index failed to break above 89.62 (euro equivalent low at $1.2455), which was a trend line resistance prevailing since the February 2002 high (peak of USD bull market).
1. The Eastern/Central European story haunting the euro was clearly a negative theme for the currency, but such a story would only prove detrimental for the euro in the event of a bankruptcy/implosion of these banks. Absent those events, those fears were confined to grading watch from credit rating agencies, thereby, not justifying prolonged selling in the euro towards the October lows.
2. It is not enough to make the case for the dollar simply based on the premise that the Feds aggressiveness renders the U.S. economy most likely to recover the soonest. The fact that U.S. credit market strains and ongoing macroeconomic spill-over show no signs of abating, justifies that intensity of the U.S. central bank measures as they reflect the critical situation of U.S. markets/economy. Also, recall that part of the Feds liquidity measures have been aimed at shoring up liquidity for foreign central banks.
3. Technically, the ensuing positive correlation between the USD and global equities suggests an acceleration of the dollar sell-off as equities extend their recovery (albeit still deemed a bear market bounce). Indexes would have to rally by more than 27%-28% from this month’s lows to 845-855 in the S&P 500, 4,460-4,500 in the FTSE-100, 4,680-4,700 in the Dax-30 and 9,000-9,100 in the Nikkei-225.
These are some of the factors most likely to make yesterday’s major Fed action different from the previous two by extending USD weakness (commodity strength) beyond just 2-3 days, and into April and May. These conditions are especially facilitated by oils' break to two-month highs above the 100-day MA for the first time since August and a rally in resource metals (copper at four-month highs).
What About Gold?Gold’s uptrend was bolstered by its ability to hold above the bottom of the
four-month channel pf $880, its ability to limit periodic declines to no more than 10-11%, as well as holding above its 50-day MA. These technical criteria were first brought up on March 6th. Having passed all these tests, I re-iterate the near term target of $1,050.
Ashraf LaidiChief Market StrategistCMC Markets66 Prescot StreetLondon E1 8HG, UKDirect +44 02 030 038 674Mobile +44 07 917 208 527Email: a.laidi@cmcmarkets.com
