Consider This

BRASS TACKS - At this point, I want to make it clear that on a medium to longer term basis, it's not looking good for the US Dollar. I've spent a lot of time talking about the fundamental woes facing the Buck, with US administration policy at the top of the list. I'm not going to get into it again today and will just add that on a technical level, the US Dollar is also not looking great over this bigger time horizon. The Euro broke above some major resistance several weeks back, while the Pound looks like it's in the process of carving out a major bottom. I cite these two currencies as I believe the Euro and Pound will outperform against the Buck relative to the other currencies.

cartoon sep 26

JUST BECAUSE X - But all that said, even if this proves to be the case, it doesn't mean we can't see a period of US Dollar strength over the shorter term. And when I say shorter term, we could see a US Dollar comeback that lasts several weeks before it dies off again. As I look at the state of the markets in the aftermath of last week's Fed decision, I'm quite shocked we haven't seen a more significant USD rally already. When you consider the following two Fed meeting implications, it's almost laughable that the market has managed to shrug them off. Now I know the market has been committed to selling the US Dollar at every turn in 2017. Still, when considering the following, it's really hard to see a result that doesn't open a wave of renewed USD demand.

Just because the US Dollar outlook isn't great, doesn't mean the Buck can't rally.

ONE REASON - The first Fed meeting implication is that the Fed is actually committed to following through with its policy timeline, something it has failed to do in nearly a decade, since the onset of the global financial markets crisis. What this means is that a market that doesn't believe the Fed will raise rates again this year is going to need to concede that the Fed looks like it actually may deliver. The market therefore needs to adjust to this reality and adjusting to this reality means pricing in higher rates, something that is clearly US Dollar supportive.

ANOTHER REASON - The second Fed meeting implication that is supportive of the US Dollar is the reality that the normalization process is moving into a different phase where the Fed is letting us know that it now sees the greater risk to the economy if rates are not going higher. This means even less incentive to be long stocks as valuations aren't nearly as attractive on the higher rates. And so, it stands to reason that money should rotate out of stocks as equity investors head for the exits, which in turn, will inevitably usher in a round of safe haven bids. And as much as there has been this minor breakdown in the USD safe haven correlation this year, make no mistake, this correlation will come flooding back if things really start falling apart. After all, the US is still the safest place to be.

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