Fed, USD and Currency Wars

Forex News and Events

Chair Yellen has provided little clarity in the timing of tightening we also didnt hear anything regarding the USD. Given the political show these testimony can become we expect some question today on the recent strenght of the USD. It seems a bit odd that traders are debating the recent Federal Reserve’s minutes as evidence that the Fed is finally engaging in a currency war. Traders point to the verbiage that the dollars rising value is “a persistent source of restraints” as evidence that the Fed is ready to engage the enemy. This minor foot note hardly provides a shot across the bow. However, the fact of the matter is that the Fed has been waging a Guerilla Currency War since 2009-2010. As modern warfare dictates one doesn’t need a formal declaration of war to know there is fighting. While advocates of market driven solution (developed nations) are not expected to engage in asset manipulation, traders waiting for a direct sentence in communication (we are devaluing our currency) will be in the dark for a long time (and perhaps should work on their CV). If anything these comments could be viewed as proof that a silent war is actually taking place. Since 2009 the Fed has been engaged in extreme policy easing. While the communicated motivation was inflation and growth targeting, the measures had a clear USD debasing effect. Fed members are smart individuals with a clear understanding that extreme measures would have negative consequences on the USD. They never had to implicitly express a weak USD policy, their actions provided all the taking. Reminds me of a discussion with a wine connoisseur who claimed that he drank wine only for the flavor, never wanting to admit that the inebriation was part of the real appeal.

At the 2009 G-20 summit the famous rebalancing theory was proposed on a global basis. This theory suggested that nations like China had to rely less on export and more on domestic consumption while the US would need less consumption and more exports. For the US to bring exports to a weighty part of GDP they would need either complex structural changes or to devalue the USD. Fed’s former chairman Bernanke understood currency wars well from his work on the Great depression. He believed that the problem with currency wars was not the strategy but the implementation. With nations randomly devaluing, achieving a benefit becomes difficult. So Bernanke’s solution is that if all parties print money at the same time the result would stimulate economies without starting a currency war. Yet the flaw is that in modern markets, currencies with a higher interest rate tend to appreciate versus ones with a lower interest rate. Printing money lowers interest rates.

We view the ECB action as clear acknowledgement of this illusory technique. The ECB president Draghi suggested that extreme expansionary monetary policies such as QE were not undertaken to deliberately cause devaluation. We can’t imagine, with sovereign interest rates as low as they are, that the ECB really believes that pushing them down further will have a marked impact on Europe’s economic conditions . We do suspect that debasing the Euro, aided by the recent evidence of economic recovery in the US and Japan, will provide a quick solution. A solution that might support Greece and save the EU.

EUR/USD is slightly improving

The Risk Today

Peter Rosenstreich

EUR/USD continues to move sideways within the range defined by the support at 1.1262 and the resistance at 1.1450. Another support stands at 1.1098, while another resistance can be found at 1.1534. In the longer term, the symmetrical triangle favours further weakness towards parity. As a result, any strength is likely to be temporary in nature. Key resistances stand at 1.1679 (21/01/2015 high) and 1.1871 (12/01/2015 high). Key supports can be found at 1.1000 (psychological support) and 1.0765 (03/09/2003 low).

GBP/USD has broken the resistance at 1.5486, confirming a short-term positive technical structure. Hourly supports can now be found at 1.5402 (24/02/2015 low) and 1.5317. A key resistance stands at 1.5620. In the longer term, the break of the key resistance at 1.5274 (06/01/2015 high) suggests renewed buying interest. Upside potentials are likely given by the resistances at 1.5620 (31/12/2014 high) and 1.5826 (27/11/2014 high). A strong support stands at 1.4814.

USD/JPY has broken the hourly resistance at 119.42. However, the subsequent sharp decline suggests increasing short-term selling pressures and alleviates the recent technical improvements. A key support stands at 118.18. An hourly resistance now lies at 119.84 (24/02/2015 high), while a key resistance can be found at 120.83. A long-term bullish bias is favoured as long as the key support 110.09 (01/10/2014 high) holds. Even if a medium-term consolidation is likely underway, there is no sign to suggest the end of the long-term bullish trend. A gradual rise towards the major resistance at 124.14 (22/06/2007 high) is favoured. A key support can be found at 115.57 (16/12/2014 low).

USD/CHF remains thus far below the resistance at 0.9554. An hourly support lies at 0.9374 (20/02/2015 low). Another hourly support can be found at 0.9284 (16/02/2015 low). Following the removal of the EUR/CHF floor, a major top has been formed at 1.0240. The break of the resistance implied by the 61.8% retracement of the sell-off suggests a strong buying interest. Other key resistances stand at 0.9554 (16/12/2014 low) and 0.9831 (25/12/2014 low). A key support can be found at 0.9170 (30/01/2015 low).

Resistance and Support: