USD bulls

Have you guys noticed that the majority of people talking about huge DXY breakouts happen to be American? There are people around talking about DXY going to 130.

While this certainly isn’t impossible it is particularly improbable if there is no new World War to spur such a move.

The reason I am focusing around the point that 99% of the people advertising DXY to 130 are Americans, because it is a function of some misplaced nationalism.

The way Forex markets work nowadays hardly permit such a move. Even if the EUR and USD reach parity, when you go by the size of the economies, Europe’s economy is still bigger than the US, it is unrealistic to expect dramatic increase beyond that point unless member states of the European Area start leaving the single currency.

Now this about currencies such as AUD, NZD, GBP and JPY. These currencies each have their merits. They can be a proxy for risk (AUD,NZD), GBP can be a non-EUR European exposure and JPY can be a safe heaven. The dynamics of the USD over the last 30 years are there for a reason and contemplating serious dramatic change seems to be honestly stupid.

The way financial markets work nowadays has spurred demand in many currencies. Reducing risk exposure now is hardly a function of putting all your money in the USD and realistically the US has plenty of problems of its own. I fail to see how the USD would suddenly go back to the times when DXY was in 160’s or so. The Federal Reserve has still to answer big questions, such as how it will start decreasing its balance sheet. Will it sell all those bonds it has acquired and many more. All of these pose a threat to the economy and markets.

My personal bet is that we will continue seeing more of the same. I top my DXY expectation personally to 120 as something I think is quite improbable. I think 112 is by far the most realistic and I expect at that time the DXY to move lower. It appears to me that we are in a big big range and will very likely continue until there are meaningful changes to how monetary policy is conducted. Why you may ask?

Because currently CB’s are playing a game of hide and seek. One CB does something then some other CB answers to the movement of the first CB. While I don’t think this is currency wars, it is certainly an attempt to keep exchange rate prices stable attempting to cut the negative effect of sharp exchange rate moves to the real economy.

Now there are the arguments on Oil and other commodities. I have long said that there is no proof to suggest that the price of Oil and other commodities like Copper have a connection and a long-term sustainable link to monetary policy. Yes, commodities went up with the announcement of QE, which is normal as it raised inflation expectations and many more, however, ultimately markets like Oil and Copper are a lot more driven on the real economy. On geopolitics and the actually truth of supply and demand. Their connect to QE is marginal. The fall in Oil prices to me seemed as a much expected occurance. After prices overshot retardedly much, after markets speculated on the effects of QE on commodities in a huge way, the market started equilibrating itself to the real economic truth.

Now the market is probably overshooting to the downside, however, that is how equilibriums are established. Markets receive a shock, after the shock prices move huge, they can stay there for a while and then they start stabilizing until reaching an equilibrium point.

More updates on this later.