USD in 2006

Discussion in 'Trading' started by GlobalFinancier, Jan 22, 2006.

USD in 2006?

  1. Bullish

    1 vote(s)
  2. Bearish

    6 vote(s)
  3. Neutral

    1 vote(s)
  4. I don't know!

    3 vote(s)
  1. Dollar has been on the rise for 2005.
    However,I think the Euro and CHF have bottomed against the USD.
    EUR/USD 1.2138.
    USD/CHF 1.2759.(the numbers come from
    Count this as another of my predictions.
    The chart is undoubtedly bullish for the EUR/USD and bearish for USD/CHF.
    What do you think?
    (I may change this outlook halfway if the chart changes, but I think I have enough evidence... Of course, if the Fed continues to be on the hawkish path, I think the USD would quickly resume it's bulltrend.)
  2. EUR/USD has risen to 1.2300 in just 2 days.
    I believe we're on a secular uptrend.
    The technicals are still bullish, but I won't elaborate on that. H&S
    with a target of 1.2450.
    International tensions(high oil prices, Nigeria, Iran etc) are likely
    to give the EUR/USD a SHORT-TERM boost. But the effects will be short term only.
    (1)China will diversify its forex reserves as well as new money from the current account surpluses into the Euro.
    Let's say $10 billion each month go into the Euro. Keep in mind, last year, $200 billion of offshore corporate profits flowed into the US due to special tax-breaks for repatriation of earnings.
    (2)Eurozone has a current account surplus. This is undebatable.
    (3)EU members have repeatedly hinted hikes in interest rates.
    Yesterday, an Austrian member of the European Central Bank said that rate hikes were inevitable. Due to pressure from EU countries leaders, policymakers at the ECB are unlikely to be to explicit about future rate hikes. But in December, ECB raised discount rate from 2% to 2.25%, still accomodative, but the first rate hike in 5 years. This also signals that the ECB acknowledges inflation as a problem, as the Eurozone economy is stagnant, and thus, interest rates would be better left unmoven. The monetary policy committee(MPC) in Britain are also unwilling to ease rates despite successive bad economic numbers. Such acknowledgement of inflation is good for gold in the long run.
    (4)2006 is a cyclical bottoming year for the US stock market. Means we need a round of price cuts for US equities. Thus, US equities may become less attractive to foreign investors. And capital may flow out of the US to seek higher returns. Currently, the US has more capital inflow than trade deficit, so it's ok. But if the US markets slump, and capital goes to find a new home, that would be a double-whammy for the USD. If capital inflow>trade deficits, then interest rates play the key role in influencing exchange rates.
    (1)The US Federal Reserve may be slowing its pace, but further rate hikes are widely expected by the market(and may be priced into the exchange rate already). However, a few difficulties have arisen.
    1)Yield differential between the 2 year T-bills and 10 year T-notes
    are almost nil. The yield curve is already flat, some say it is
    already inverted. If the Fed continues to hike rates aggressively,
    then it will inevitably cause an inverted yield curve, and an
    economic recession is likely to follow. However, if the Fed leaves
    rates put, if inflation catches up, the Fed will be in a bad position.
    (2)The $200 billion of earnings repatriation by US corporations will
    no longer happen this year.
    (3)Arab countries may decide to diversify their petrodollars. Iran
    has already transferred about $40billion. Though that's a tiny drop.
    That sums it up. In 2004, people were looking at trade deficits. In
    2005, they were focusing on interest rates. In 2006, both will be
    important, but I believe interest rates will be the key focus.
    If the Fed continues to hike rates AND long term rates move up,
    creating a normal yield curve, it will have bad implications for
    housing(which accounts for 5% of the economy but is now accounting
    for half the growth in GDP). Capital outflow is still likely.
    Long term rates are unlikely to rise rapidly. Corporations have been cutting down on debt and Asians have been investing huge amounts in the US bond market(especially T-bond), keeping long term rates low (which are influenced by supply and demand of money, not Federal Reserve open market operations). But in such a case, a neutral outlook would form.
    For now, the bull is with the EUR/USD. Next FOMC meeting on Jan 31st, attention will be paid;).