Last week's oil price break above $75 was an essential catalyst in accelerating the pace of USD selling beyond $1.50 in EUR/USD, 0.93 in AUD/USD, and 1.03 in USD/CAD. Technically, the next oil barrier emerges at $82.00 (100-week MA), a break of which would extend the rally towards $89.90. Coincidently, U.S. equity indexes also face their next resistance at the 100-week MA (1,100 for S&P and 10,209 for the Dow). But a more important landmark for the S&P 500 stands at 1,121, which marks the 50% retracement of the decline from the October 2007 high to the March 2009 low.
Recall how oil prices repetitively failed to break its 200-week MA of about $75 in August and September until recurring dollar weakness (hawkish non-U.S. central banks) empowered oil traders to breach the key level. The simultaneous technical resistance in both of these high profile instruments (U.S. crude and S&P 500) may well dissuade the accumulation of fresh risk appetite. And Wednesday’s downgrade of Wells Fargo may have been instrumental in stepping up trading volumes in a down day. But the only viable means for dollar bulls to see hope again is the implementation of the exit strategy. Short of such implementation, earnings disappointments and/or negative guidance, FX traders will see little resistance to selling the dollar.
Fed ought to stop talking about the dollar
Federal Reserve officials should either get the same vigorous training when making statements about the U.S. dollar or completely refrain from taking about it, and allowing the U.S. Treasury exclusive authority to comment on the currency.
For the second time this week, a member of the FOMC causes more selling in the dollar after choosing to shed light on the U.S. currency to the public. Early this morning, the Boston Fed’s Eric Rosengren (not a current FOMC voting member) said the decline of the dollar reflected investors improved confidence with the economy and their resulting appetite for risk. While such remarks are no more than a stating of the obvious as far the current FX market dynamics, they constitute an overt green light to sell the currency, especially when uttered by policymakers of the interest-rate setting body of the U.S.
On Monday, Chairman Bernanke may have intended to support the dollar when he raised the importance of timely exit strategy, but the way he went about it had the opposite effect. Bernanke said adopting a fiscal exit strategy "is critically important in order to maintain confidence in our economy and confidence in our currency". So far, the Fed has made it clear it would not be exiting its monetary policy strategy any time soon (aside from talk about reverse repos). Bernanke's speech placed the onus on the Treasury as far as fiscal policy is concerned.
And since fiscal tightening by the U.S. Treasury is not expected any time soon, traders easily conclude that the lack of any exit strategy (fiscal or monetary) will empower them to retest last year's all time lows in the greenback.
Ashraf Laidi is Chief Market Strategist for CMC Markets, he can be reached at a.laidi@cmcmarkets.com
CMC Markets,66 Prescot Street, London E1 8HG, UK
