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Updated: It’s Not Currency War, It’s Ring Around The Rosy! $DX_f #Dollar

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by Rasool Cunningham
Trading Editor
Philadelphia, PA (DYDD)

Update 1-3-15

I originally wrote this in June of 2013. This write-up is relevant to what we see happening in the dollar now starting off 2015. To give our ally’s in Europe and Japan some relief the Fed is allowing the dollar to strengthen. Many advantages come with having the world reserve currency, but so do many responsibilities. Our economy has recovered a lot faster than many other developed nations using QE and a relatively weak dollar. Maybe it’s time to let our ally’s catch up.

You can’t tell that this wasn’t discussed, agree to, and implemented in cooperation between the ECB, BOJ,The Saudis (with the oil drop), and The Fed. Big moves like the move in the dollar, and the move in the Dollar don’t just happen. Powerful people make them happen with the blessings of other powerful people. I looked back in time at the Dollar Index $DX_f monthly chart. To my surprise a rising dollar coincides with the run up in stocks during the tech bubble.

From 1995 to the very end of 2001 and very beginning of 2002, the $DX_f went from $81 to $121. U.S. stocks went gang busters during this same time. So U.S. Dollar and U.S. stock market positive correlation can go on, even though we saw a one day break yesterday. The $DX_f move yesterday scared a lot of people, me included! It was monstrous! After running up the past five months, then gapping higher; running even harder after the gap!

It’s definitely the dollars’ turn. And that doesn’t mean stocks have to slump. We’ve seen it before. The circumstances are different now, but the differences aren’t so different that we can expect a different outcome. On top of it all, there is zero reason for the Fed to raise rates. Thinking like a central banker, a strengthening dollar guarantees the Fed doesn’t have to raise rates any time soon. You see Russia do an overnight 650 basis point raise because their currency was falling hard. If you look back in time that’s the only thing that forces a central bank’s hand to raise rates. Not politicians, or anyone else.

From the Fed’s standpoint, this is a sweet spot. The politicians have little to complain about. At least not the type of complaints that worry the Fed most. While the strong dollar may put a dampen on the earnings of international firms, these same firms get a huge cut to their cost of operating abroad. This may not cancel out the hit to earnings, but it may mean things won’t be as bad as would be expected. At any rate,it’s not currency war when the moves are among ally’s, it’s ring around the rosy!

This concludes the update. Everything beyond this point is the old write-up. Thanks for reading!

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2015-01-03_1644I’m a speculator, so, I speculate. I’m not going to say this is 100% what will happen.

To make it simple, let’s say the U.S. is slowing down along with the rest of the world. (It is) We have to expect a reaction from officials (the Fed). The bubbles have been deflated a bit. I won’t say all have been popped by Ben Bernanke’s tap on the breaks, but people understand that it’s a two way street. Expectations have been managed. The Yen has weakened a lot, and so have the other major currencies against the dollar. It’s our turn again. It’s not currency war, it’s ring around the rosy! We all work together, or we all fall down.

Judging from the econ data coming out of Japan their devaluing has had positive effects. Good, that buys them time, not much, but some. It also signals that it’s time for someone else to get some relief. With the dollar being the reserve currency it has to help relieve stress in other countries like Japan. It does this by allowing them to devalue against it. It is the most important function of a reserve currency in a free floating currency market. But once it gives relief it needs to relieve a little pressure of it’s own before going on to help other countries in the global system. In fact, by going down, or devaluing, the dollar is helping itself (the U.S.) and others in the global economy.

Emerging markets need a weak dollar to relieve stress in their own economies. I didn’t understand this until recently, but part of the logic goes: a weak dollar pushes EM currencies up and commodity prices higher. So while prices go up in the U.S. where people can afford to pay a little more, they go down in EM’s. This is a look at the plumbing underneath the world currency exchange market. understanding of these dynamics is important.

They’re the cause of all central bank actions. We can sit and talk about the technicals, or fundamental until our faces turn blue, but without a frame work of how the system functions at its best, and worse; you don’t really have a reference to go on. When things happen in the market we mostly regurgitate what the fund managers and elite economist and traders and investors tell us.

That works when the road ahead is clear. But when things are blurry, and the rain is coming down sideways hard impairing vision after only a few yards; it’s not easy to trust your own thinking from day to day, let alone someone else’s. The understanding of the way central bankers think, and what their various economies need is an edge.

You need a good imagination to speculate. You need to be able to see where central bank action should go, and meet it there. But not too early. I’m not the best at this, but I think I try the hardest. The market itself is the same way. If you can see where the economy is going you can meet it there with great trades that have been on long enough to have capitalized on nice market moves.

To do this you have to be willing to evolve your thinking at two different speeds. More than that really, but let’s keep it simple. Long term, and short term. Long term thinking evolves slower, short term, faster. Nimble market strategies mean they should be able to turn on a dime. The market doesn’t always cooperate, so, you have to change your thinking faster than your trading, and some times, vice-verse. Yes, it’s a tricky market out here, and we live in thee most interesting times.

But we have the benefit of hundreds of years of activity to learn from. We all have an edge there. Some prefer to exercise it more than others, but it’s all there for everyone to see. But we think something has changed. It has: The names have changed. But the game remains.

The market still moves on the same principles it always has,. Fear and greed. Emotions triggered by a million different things at once. This is the most exciting time in the market in the last 100 years, traders. I hope we’re all taking notes. I hope I was clear hear in getting my thinking across. Any questions please feel free to ask here or on twitter.

Good luck this week traders, and thank you for reading.


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