The factors in place promoting a higher dollar are still in place

Outlook

Reviewing press reports, we can’t find any analysts who think the dollar rally is over. This is just a setback and a silly one that is mistakenly based on a dovish wishful thinking. Bloomberg quotes Jeffries analyst Webb: “It doesn’t probably change the bigger picture, which is favorable for the dollar. The bar for further QE is very high. It’s going to take very weak data to stop them from tapering.”

The WSJ remains on the dovish bandwagon, saying “Fed affirms easy money stance” and “the Fed is in no hurry to withdraw its monetary-policy support.” Well, yes, and that is what Bernanke has been saying all along. It’s not new and it’s not news. It’s possibly correct to say the emphasis has shifted to “sustained accommodation” from “accommodation ending, man the lifeboats!” Still, it’s a nuance, not a change.

The out-of-channel spikes late yesterday are, technically, breakouts. They hardly ever last just one day or even two. But when they are based on a falsehood or a mistaken perception, they are aberrations not to be trusted. Today has the potential to be critical. If we calculate a Fibonacci retracement from the 6/19 high (1.3417) to the July 9 low (1.2753), the 62% retracement lies at 1.3162. This was surpassed yesterday by the high but not the 6 pm “close.” If the euro matches and surpasses that level today, we should probably expect a test of the previous high (1.3417). We don’t expect that, but you never know. Whatever comes next, we should not expect the old channels to remain valid. We have to re-draw everything.

The factors in place promoting a higher dollar are still in place. It’s a question of pace and extent. After all, US yields are on an irreversible rise (unless a catastrophe occurs) while the ECB has promised low and possibly lower rates for the foreseeable future, probably longer than 12 months. Besides, Europe is in recession and the US is not, even if Q2 is tepid at only 0.6-0.8%. . The US banking sector is (arguably) in better shape so systemic risk in the US is lower than elsewhere. The wild card is China, which may be having a hard landing or not—nobody seems to know—but a hard landing must favor the dollar as a safe-haven (the yen, too, which can become confusing).

We get the usual Thursday jobless claims today, probably 340,000 from 343,000 the week before, according to the Bloomberg survey. This report has the juice to change minds but probably not this time. At a guess, the anti-dollar dovish view is going to prevail for a while but it’s “wrong.” This sets up an unbearable tension—trade with the crowd or trade good analysis? Alas, the crowd wins.