USD analysis

15 posts / 0 new
Last post
Subprime JD's picture
Subprime JD
Status: Platinum Member (Offline)
Joined: Feb 17 2009
Posts: 562
USD analysis

The USDX has been showing resistance at the 75 level for the past 3 weeks. It can possibly hang around this region for quite some time, driving hedge funds and speculators insane with anticipation. How do we possibly come up with a near to intermediate term forecast? By looking at the facts.

Fact #1  Everyone and their mother/father/sister/brother is terrified of the dollar falling more. Its almost a foregone conclusion in the mainstream that the dollar will be lower in the next few years.

Fact #2 Deficits larger than $1 trillion are almost certain for the next 2 years. As the market looks ahead further dollar devaluation will occur as a result of the extravagant deficits and monetization taking place.

Fact #3 The new "dollar carry trade" is being spouted every day by economists and MSM heads. Just today the Chinese central banker warned of the instability of the carry trade on the world recovery. Crowded trade fears can cause sharp upswings in the intermediate term, but resumed selloff of dollar as fundamentals override the crowded trade.

Fact #4 Credit asset destruction is still occuring and deflation will occur if Ben stops printing.

The low of 71 in April of 2008 must be understood in order to further understand the FOREX market. Some say that the USDX hit a bottom becuase of high oil prices which exacerbated the trade deficit. Though this is somewhat true, look what happened in June 2008 when crude was screaming higher: the USDX rose from 71 to 74.5

The dollar then retraced to near record lows and then rocketed higher when the financial system imploded. Notice also Feb to March as the USD plunged from 77 to 71. How did oil perform during those two months?? Feb 08 had $95 crude while March 08 had $101 crude. Did a $6 increase in price of Crude justify such a steep plunge in the dollar? Or maybe the market was looking forward as it saw crude smash through 140?

Importantly, back in Feb and March of 2008 when the US had a much smaller budget deficit than it has today the dollar plunged to record lows. Today, the deficit is 3 TIMES LARGER yet the dollar is holding its ground. One good explanation back then was no deflation expectations whereas today the fear of deflation is there and alive. Market participants know all to well that if the fed shits off the money spigot then down the assets go. This could explain why the dollar isnt falling as fast as it should be basing it off of last years justification for falling. Last year the dollar tanked as rates were cut. This year if rates are 0 but no monetization then dollar rises as debt assets get crushed. Important fundamental to take into account when looking at dollar.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: USD analysis

Makes me regret our dependency on oil, of which we import 2/3rds of it.

Benny Jenga Bernake.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: USD analysis

The dollar cannot be looked at in a vacuum.  Keep in mind the index is just based against the Euro, Yen, Pound, and Canadian dollar.  Even if Ben keeps printing, and the dollar devalues, the effect will be mitigated if the monetary authorities governing the currencies it's measured against are doing the same thing... which they are.  It is quite conceivable that the dollar and gold rise together, as the dollar-index currencies devalue faster, but all fall vs. gold.

Subprime JD's picture
Subprime JD
Status: Platinum Member (Offline)
Joined: Feb 17 2009
Posts: 562
Re: USD analysis

Presently, USDX at 75= 76-80 dollar crude.

June 2008- oil at 120 USDX at 72-74. So perhaps crude isnt the main factor in dollar devaluation. Macro econ factors also play a huge role, more so now then during the summer of 08.

Farmer Brown's picture
Farmer Brown
Status: Martenson Brigade Member (Offline)
Joined: Nov 23 2008
Posts: 1503
Re: USD analysis

The USDX Components

Now that we know what the basket of currencies are, let’s get back to that “geometric weighted average” part. Because not every country is the same size, it’s only fair that each is given appropriate weights when calculating the U.S. Dollar Index. Check out the current weights:

U.S. Dollar Index Weights

As you can see, with its 12 countries, euros make up a big chunk of the U.S. Dollar Index. The other five make up less than 43 percent.

Link: http://www.babypips.com/school/the_usdx_components.html

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: USD analysis
Farmer Brown wrote:

but all fall vs. gold.

Money mouth

plato1965's picture
plato1965
Status: Platinum Member (Offline)
Joined: Feb 18 2009
Posts: 615
Re: USD analysis

 Yep.. The problem with using the USDX is that it's a relative paper standard.. it's not tethered to anything absolute..

 Gold ought to be a better (very long term) metric. assuming it's unrigged in the short/medium .. ah there's the rub.. *sigh*

  Oil ? Arable land ?  Bread ?

  What price (when inverted gives the best indication of a currencies worth..) What can't be faked, manipulated and remains fairly stable in value..

  The big mac (tm) is probably a better metric than the USDX..

  $ = 0.3 big macs at the moment . ? 

 Anyone know a site that gives graphs in terms of BMs... ?

tried plotting silver in bigmacs  here.... http://stockcharts.com/h-sc/ui?s=$BIGMAC:$SILVER&p=D&b=5&g=0&id=p57620814086

 .. no joy.. *sigh*

 

 In fact each of us has their own value metric..

if we spend most of our income on heating + food, then our personal measure of a currencies value is highly dependent on those prices..

 Mind.. not everything has a price..

eg  sterling is unbacked by love...  not since the beatles closed the Love window in April 64...

 http://www.youtube.com/watch?v=waewnX3UKzw

 

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: USD analysis

Now that "Black" October is done, market sentiment is getting bullish again. As every financial asset is inversely correlated with the dollar, I continue to be bullish on the dollar.

Everybody was Bullish-Alert

Ok, just another thing to keep an eye on. The AAII sentiment indicator was updated and we now see that as of 11/6/09, investors are getting very bullish. Keep watching the dollar. Just like on a boat, if everyone is on the same side of the boat, something bad may happen. Although this data is delayed by 1 week, we must be watchful.

The chart shows a dip down to 30 in sentiment. A dip to 30% or lower indicates everyone is too bullish!

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: USD analysis

The 1:56 minute point of this video is probably the best indication of where the dollar is headed.

docmims's picture
docmims
Status: Platinum Member (Offline)
Joined: Jun 17 2009
Posts: 644
Re: USD analysis

Article at zero hedge says smart money is turning bearish and dumb money is still bullish.  Bad sign.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: USD analysis
docmims wrote:

Article at zero hedge says smart money is turning bearish and dumb money is still bullish.  Bad sign.

Jim Puplava said it happens in 3 legs. The hedge funds gobbling this up is the second leg. Soon it will be on TV and when the "dumb" money piles on good night.

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: USD analysis
plato1965 wrote:

  The big mac (tm) is probably a better metric than the USDX..

  $ = 0.3 big macs at the moment . ? 

 Anyone know a site that gives graphs in terms of BMs... ?

The Economist has been publishing a Big Mac index for about ten years. Here's the Wiki article:

http://en.wikipedia.org/wiki/Big_Mac_Index

Latest values are behind a subscription wall, but maybe some helpful subscriber would post them for us. Cheers.

plato1965's picture
plato1965
Status: Platinum Member (Offline)
Joined: Feb 18 2009
Posts: 615
Re: USD analysis

 Aye.. problem is the "stickiness" .. you can't get real time second by second pricing...  they change the menu prices what.. yearly..

 And besides, if everyone used them as an index, some CB or Forex player would pay them to rig the price / rate of change and make a killing..

 ( a sort of heisenberg principle of manipulation of common observables)..

 Still, not bad as a long term rough guide though..

 

 My other point about currency valuation (or inflation) being essentially a personal thing still stands though..

 Stripping food + oil + housing out of the CPI... means the official target (2% for BoE) deliberately ignores what is most important to the poor schmucks producing the real wealth..

 

machinehead's picture
machinehead
Status: Diamond Member (Offline)
Joined: Mar 18 2008
Posts: 1077
Re: USD analysis

According to my analysis, the dollar is in the toilet:

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
USD Will Soar Over Remembi?

Albert Edwards Calls For The Next Black Swan: Expect Yuan Devaluation Following Deep 2010 Downturn

With everyone and their grandmother screeching that it is about time for China to inflate the renminbi, despite that such an action would be economic and social suicide for the world's most populous country, SocGen's Albert Edwards once again stalks out the Black Swan in left field and posits the contrarian view de jour: China will aggressively devalue the yuan following a deep 2010 downturn coupled with escalating trade wars. As Edwards says: "I think the next 18 months will see major ructions in the financial markets. The consequences of a double-dip back into recession next year require some lateral thinking. If the carry trade unwind results in a turbo-charged dollar, any collapse in the China economic bubble will be doubly destructive to commodity prices. A surging dollar, coupled with China moving into sustained trade deficit through 2010, could prompt the Chinese authorities to acquiesce to US pressure for a more flexible exchange rate. But why does no-one expect a yuan devaluation?"

The critical observations from Edwards that may end up being spot on, courtesy of everyone with an FX account being short the dollar.....

Now that is what I call a contrarian POV...fantastic!

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Login or Register to post comments