ALMOST BUT NOT YET - Earlier this week I talked about the overbought Dollar and the risk for some form of a correction. While I retain my medium-term bullish outlook for the Buck, I do believe there will be some form of a catalyst in the days ahead that opens a period of Dollar selling. Ultimately, there isn't anything out there on the fundamental side that can do much to harm to the Buck. But this doesn't mean we can't see small periods of profit taking and correction. Having said that, if we isolate the EURUSD and GBPUSD charts, it appears there is very little in the way of any meaningful technical support in both until 1.1640 (2005 base) and 1.4815 (2013 base) respectively. Given the correlation between the two major pairs, it wouldn't be surprising to see these levels tested at the same time. So while there could be opportunity to play a EURUSD or GBPUSD long in the days ahead, it would be ideal to wait until these levels are tested. I had mentioned looking to take a shot at a Cable long or USDCAD short a few days back. But this recommendation was just for an intraday punt and nothing more. I also never took any of these positions and am still sidelined as far as any USD exposure is concerned.
THE CATALYST - My key FX exposure at the moment is long AUDNZD 1.0475 and long EURCHF 1.2030. I caught some really nice USD longs from late 2012 through the third quarter of 2014, but have since been mostly sidelined with the Buck, with the exception of some short-term plays here and there. So what would trigger a sell-off in the Buck? The primary driver of such a catalyst would have to be the Fed. The markets have been pricing in a Fed tightening this year and this anticipation of a monetary policy reversal has been fueling USD demand on the favorable yield differentials. But if the Fed retains a more accommodative stance through 2015 and fails to deliver the tightening markets are pricing, this could be viewed as a risk positive for markets and stabilizer which opens the door for USD outflows into higher yielding markets. In a world where everyone is starved for yield, a message from the Fed that it will be more sensitive to US divergence with the global economy, will be a message to go ahead and flow back into risk. This is a scary prospect indeed as it incentivizes more excessive risk taking and a bubble event.
THE INEVITABLE - I am not convinced, nor do I believe this is the right message to send. But hints of this type of a message or leanings in this direction, could very well do the trick. Still, there isn't much more the Fed can do to ignore the fundamentals. Like it or not, one of the side effects of a prolonged periods of unprecedented ultra accommodative monetary policy, is a massive flow of funds back into the US Dollar as the Fed does away with its QE strategy and exports it to the rest of the world. So maybe we see some USD weakness here and there. But these dips will continue to be bought up in a fast and furious manner. There really isn't a better currency to be long in a macro picture starring global deflation risk and featuring geopolitical uncertainty.