End of dollar's latest rally. 10 Feb 2005

[20pipsaday]

"My thinking about how the USD would be defended is higher interest rates. In short, as high as is necessary. Given the choice between sending the domestic ecomomy into the ground or letting the USD sink, I think that the authorities would choose to defend the Dollar due to the broader implications. "

Politicians instincts are to save their own rear ends, not the good of the country.... for that reason I think the above statement will be just the opposite. The Fed may want to sacrifice the domestic for the dollar, but I dont think for a second politicians will see it the same way

as soon as the domestic runs into any trouble (housing, stocks, bonds etc etc) the public will expect action from their government. And because the gov/fed has always comes to the rescue in the past, not coming to the rescue would probably cause panic IMO

If you watch the yield curves on tnotes, you will notice that right now the market seems to be pricing in a coming recession.... a couple more rate hikes and we will be inverted.

Mr Greenspan seems "perplexed that the market is not listening to the fed and that long term yields are dropping as the fed is raising short term rates".

Kind of weird that he is making the assumption that the market is wrong and that the fed is right. Right now the market players seem to be calling the fed's bluff, pricing in these rate hikes as very temporary

so in a round about away, what I am saying is that buying USD because of the expected yield boost from fed rate hikes may not be the best plan of action, when the market is busy pricing in these rate hikes as not possible to maintain

hope my thoughts are making sense

[psperos]

Originally Posted by 20pipsaday

If you watch the yield curves on tnotes, you will notice that right now the market seems to be pricing in a coming recession.... a couple more rate hikes and we will be inverted.

This causes extreme reason to be cautious. The market is speculating a recession that has not happened yet. Masses are never correct at predicting the future, and I’m not saying greenspan is... all this leaves is more room for the market to be extremely wrong.. I would not want to be short the dollar if this bias were to ever shift.

The more the market speculates a recession and pushes long term yields down, the less likely the US will have a recession based on the rate impact that market is actually forcing on it.

[20pipsaday]

ok so lets swing this topic around then....

lets say I go with you guys, and I do believe the dollar could have a large rally (10% rally)

what pair would you think would be the best to go long USD on?

One of the previous posts mentioned AUDUSD and that does sound good to me:

1) decreasing rate differential audusd
2) gdp forecasts for Oz are being downgraded
3) ridiculously high deficits and housing bubble (thanks to previous poster)
4) Technically the band from .79 to .82 has multiple (more than 10 years?) of resistance

only problem is that the RBA seems to be warning of future rate hikes? maybe we arent at the top yet? wait for .80? wait for .82?

so pretty much I have already picked USDJPY as my bearish USD trade, that trade is already on.

now I am looking for my bullish USD trade, open for suggestions and comments (these trades are to be 6 month+ trades for me at least)

thanks all

[Smurf1976]

I do follow your logic 20pipsaday and agree that you could be right... However, my personal thinking is that politicians like to APPEAR to look after the masses whilst actually favouring the ruling elite.

Why else have the following been allowed to occur in the US, Australia and other countries when all are so clearly against the wishes of most?

Genetic engineering of food, Iraq war, nuclear industry, patients paying for medical treatment with private ownership of hospitals, deregulation of utilities, outsourcing of once secure jobs, "free" trade, allowing private ownership of water resources, tax cuts for the wealthy and corporations, growth of "casual" jobs...

All of these things have benefited the elite at the expense of the masses.

Don't misunderstand me, I'm not a socialist or anything like that, but the way I see it governments in general do things to benefit those at the top of the chain rather than the bottom. I don't see that changing but I do acknowledge that if it does then that changes EVERYTHING.

[20pipsaday]

well i guess the next most logical question is do we then believe the ruling elite in each country is in sync with the ruling elite in other circles?

if they aren't and their interests are not the same, then there could conceivably some very unexpected outcomes

BTW the more I look at the AUDUSD, the more I like it for having a potential top out at 0.82....

might be worth buying a call for 0.82 here and loading up on spot shorts if it manages to break higher than where we are now

[psperos]

Originally Posted by 20pipsaday

ok so lets swing this topic around then....

lets say I go with you guys, and I do believe the dollar could have a large rally (10% rally)

what pair would you think would be the best to go long USD on?

One of the previous posts mentioned AUDUSD and that does sound good to me:

1) decreasing rate differential audusd
2) gdp forecasts for Oz are being downgraded
3) ridiculously high deficits and housing bubble (thanks to previous poster)
4) Technically the band from .79 to .82 has multiple (more than 10 years?) of resistance

only problem is that the RBA seems to be warning of future rate hikes? maybe we arent at the top yet? wait for .80? wait for .82?

so pretty much I have already picked USDJPY as my bearish USD trade, that trade is already on.

now I am looking for my bullish USD trade, open for suggestions and comments (these trades are to be 6 month+ trades for me at least)

thanks all

the dollar index is weighted with 57% of euros 13% yen 11% Cable 9% cad and 4% CHF . If the dollar index ever does break out i would want to be long the dollar against the euro.

You could even make your own basket of pairs, to go long the dollar, splitting them up by the same percentage the dollar index is made up of.

Either way, if the dollar does bounce, there will be no exceptions. Value should adjust to everything.

[Smurf1976]

In referring to the "ruling elite" I mean, to a large extent, bankers and the various extraordinarily wealthy families.

The Fed is actually a private bank, not an official arm of government. It may well work very closely with government, but is not PART of the government as such.

Likewise, depending on your location in the world, various energy, resource and other economically dominant organizations work VERY closely with government. There are places where a resource or energy company basically IS the government. Not in principle but in practice. Likewise the role of bankers.

I therefore believe that, if it really does come to the crunch where something has to go, the Fed will not intentionally allow its own "shareholders" (and likely itself) to sink in order to benefit politicians or the masses.

Accordingly I believe that the US / Fed will defend their "right" to print as much of the world's reserve currency as they like until such time as it is clear that they have no means of continuing. This time WILL come but I am thinking in terms of years rather than months.

Regarding the AUD / USD, I agree totally that a rise to around 82c is on the cards. The USD is down hard at the time of writing. That said, I do still believe that AUD will fall, and USD will rise significantly in terms of most currencies, at some point during 2005.

Once the expected rise has occurred I will reconsider the situation. At this stage my broad expectation for the USD is down in the short term (possibly to around 78-81), then a decent rally (over 90) and THEN we get the "real" decline to new all-time lows that everyone is waiting for. That decline is not necessarily the decline into oblivion though.

I think it is somewhat dangerous to predict timing but in general these things take longer than logic would suggest. If I was absolutely forced to make predictions as to timing then I would suggest around 2012 there could be some sort of panic in relation to USD. That is not a strictly scientifically based forecast but I have incorporated oil (my own forecasts) and other financial market forecasts into that statement as to timing. Of course it could be wrong.

I'll keep watching the markets and let them decide what is going to happen...