Over the past week there has been a lot of “official” (read:Central banker) chatter regarding the dollar and its relative strength/weakness in the FX firmament. What is interesting is that all this rhetoric is emanating just prior to the release of the US NFP report and G7 summit this weekend. A brief recap:
- BOE’s Mervyn King posited last week that a weaker GBP (stronger Dollar) could actually be a positive outcome for the export sector and general re-balancing of trade accounts. Predictably the pound fell sharply on this statement and continued the sell off that hit 1.5770, an important support level, early this week.
- The SNB continues to maintain that they will do what is necessary (including intervening)to ensure that the CHF does not appreciate dramatically, especially vs. the euro. Note that although the USD/CHF rate has hit new 2009 lows, EUR/CHF is holding above the 1.50 level that the SNB has indicated is their “line in the sand”.
- Japan’s new regime appears to be clueless. They may have opened Pandora’s box with their comments that a stronger Yen might actually be good for their economy before “getting religion” as they witnessed the FX market push that currency close to its historic highs, which seems to have sobered up their policy makers a bit as they rushed to revert back to the norm, namely expressing concern, and threatening intervention, over the rise of the Yen. It might be a case of trying to close the barn door AFTER the horse has run off as the market might just want to call them on this to see if they have the resolve to “walk the talk”.
- Finally it was the ECB and their inimitable leader Trichet’s turn to start singing the praises of the almighty dollar. In what might well turn out to be a seminal moment for the fate of the dollar over the medium term horizon, the ECB chief came out, after the G20 pledge to re-balance the global economy, and explicitly expressed concern about the Euro’s strength and threw his support for a stronger dollar. This was followed by comments from EU commissioner Alumnia today who stated that the common units strength will be discussed at this weekends’ G7 meet.
The weak dollar story has been told ad nauseum over the past few months and, as I have mentioned in previous posts, there is a lot of merit to the rationale that leads one to conclude that the dollar is destined to go to “hell in a hand basket”, but, if for no other reason than to provide some balance to the debate or provide fodder for those who like to ridicule the sheer absurdity of the premise, I have been championing the possibility of the dollar strengthening over the course of the next few months. If the G7 meet comes up with a clear statement resolving to tackle the theme of re-balancing then the time might be ripe for the US unit to exhibit some much needed strength, BUT, if nothing tangible comes out of this after all the rhetoric leading up to it, the market will take the dollar behind the proverbial woodshed.
This weekly EUR/USD chart sums up the possibilities. In order for the aforementioned dollar strength to materialize, 1.4300-1.4350 needs to breached conclusively on a weekly basis, otherwise any move lower can only be viewed as corrective in nature and the threat of a break above 1.50 intensifies. Either way it looks like 2009 will end with some volatility!
FX Diem 