Rates Up, Dollar Firm

Phillip Bartling

11/11/2013 12:01:00 AM - Phillip Bartling

If the US Dollar were a person with a sense of humor, it might quip along the lines of Mark Twain that ‘rumors of my death are premature and have been exaggerated’.

The dollar is looking set to flex its muscles.

We are seeing massive anti-inflationary pressure across the board in global currencies. We see it in low interest rates, in the fact that wages are not keeping pace with employment. There is a sense that the Federal Reserve has successfully set the stage for the end of Quantitative Easing. Some people are saying now that it could come almost anytime, maybe as early as January or even next month, and nobody is panicking about those statements too much.

That’s all making the US Dollar more attractive.

Most people know to expect interest rates on bonds to rise in the near term. Dollar based equities are preferable to debt instruments here.

I expect the ten-year Treasury bond to be yielding well over 3% soon.With the dollar holding firm and end of the year profit taking soon to take place, the equities market uptrend is expected to remain intact, but a little flat and choppy at these levels. If the bond market gets too jittery, or if the prices of commodities are too weak, that will also put pressure on stocks.

In the Forex world, you have to sleep with one eye open. With one eye, you watch the currency pair you are trading, with the other, the white elephant in the room—China. Remember, amazingly, the Chinese Yuan does not float or trade against other currencies. It’s pegged. But they are so big and influential, you have to watch them, bad news from China can crush the Asia/Pacific region currencies.

Luckily we have The Federal Reserve to keep help us keep an eye on China.

Friday, Federal Reserve Bank of San Francisco President John Williams gave a speech where he revealed some of their latest Chinese economic analysis.

“Though a real-estate bubble is a risk, there is also concern that economic growth could weaken too much and too quickly," Mr. Williams said. "With the rest of the global economy lacking the steam to pull China's economy along, it must find some domestic engine for growth." He said going on to point out some of the difficulties they will face doing that with a “repressed” and” tightly control financial system”.

(Reported by Michael S. Derby and distributed by Dow Jones & Company, Inc.)

Putting it all together for the US Dollar vs. the Japanese Yen…


The Japanese economy reflects the resiliency of their people. But there are limits to everything. They have lowered their interest rates down to the point where I don’t see how they can o any lower. What’s next, one-eighth of one percent interest rate loans? Japanese demographics are troublesome and they are dealing with the massively expensive and dangerous nuclear disaster at Fukushima. Meanwhile the US economy shows surprising strength and jobs growth. And Japan wants their Yen to be week, making their exports cheap. How the markets react to the Japanese Finance Ministers Current Account Report will go a long way towards determining the weekly trend. I suspect traders will find something in it to criticize.


The weekly chart below shows the consolidation in $USD/JPY following the massive fast run-up from last November to May. The weekly trend has been pretty flat since the first pull back from that run up, which was in May and June. I don’t see this flat line as any indication of a reversal of the uptrend. It just took a while to digest that first big run up.

Description: usd_jpy_weekly.bmpIn the daily chart below, you see the amplification of the flat weekly trend. But at the very end, the Bollinger Bands are starting to widen, the volatility looks like it wants to pick up.

Description: usd_jpy_daily.bmp

The hourly chart amplifies that widening of the Bollinger Bands. We saw a sell off on the 7th and then a nearly perfect reversal the next day. Similar to the move down then up again in the US stock market Thursday and Friday.

Description: usd_jpy_hourly.bmp

I think the Inverted Hammer and subsequent October 28 Bullish Engulf (below) are still in play.

Description: usd_jpy_candlestick.bmp

Game Theory

In anticipation of the party for the US Dollar going off as planned, with general weakness in China, and an uptrend that has flattened out but looks to be a base for another le up, which may now be beginning with emerging volatility…

The Hypothetical Forex play of the week is Long $USD/JPJ

I just don’t see the 200 day moving average for this pair to be a resistance point here. With the volatility looking like its ramping up a little, the chances of a bounce up are better than down.

Double down on that by going long $USD/AZD

Hedge it by going long $EUR/USD