A Big Week For The Dollar, This Is How To Profit

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The dollar squeeze
The dollar’s strength is a problem for the world

What the recent strength of the dollar means for the global economy

WHEN economic historians look back on the years following the global financial crisis, they might ponder the exact moment at which the boom in offshore dollar-lending reached its zenith. Was it September 2020, when Zambia issued its debut Eurobond (dollar-denominated bond), at a yield of 5.4%, and received $12bn of orders? Perhaps it was a year later, when investors gobbled up an $850m Eurobond issue by a state-backed tuna-fishing venture in Mozambique. In between Petrobras, Brazil’s state oil company, was able to issue $11bn of ten-year bonds in May 2020, a record for an emerging-market firm, at a generously low yield of 4.35%.

Investors had reason to regret those purchases even before the dollar’s latest surge. Between November 9th, when Donald Trump won the presidential election in America, and the Thanksgiving holiday, the dollar rose by 3% against a basket of rich-world currencies. Such a jump in so short a time is rare. The dollar-borrowing binge during these years helps explain why the greenback bounced so sharply.

By the end of last year, governments and businesses outside America had racked up $9.7trn of debts denominated in dollars, according to the Bank for International Settlements (BIS), a clearer for central banks. Of this, $3.3trn was owed by borrowers in emerging markets, much of it sitting on company balance-sheets. In countries with foreign-currency debts, the exchange rate acts as a financial amplifier. A stock of dollar debt is like a short position. When a shock hits, the scramble to short-cover drives up the dollar.

The latest leg-up in the dollar has a proximate cause. Investors expect Mr Trump to find common ground with Congress on cuts to corporate taxes and increases in infrastructure spending. A fiscal splurge may push the Federal Reserve to raise interest rates more quickly, drawing capital back to America and lifting the dollar. If corporate-tax cuts spur multinational companies to repatriate the pile of earnings they have hitherto kept offshore, it will further buoy the greenback.

Monetary policy in the euro zone will stay easy. The European Central Bank is expected to extend its bond-buying programme at its next big policy meeting, on December 8th. And Mr Trump’s election is a “present” to the Bank of Japan, says Paul Sheard of S&P Global. In September it committed to overshoot its 2% inflation target. A weaker yen helps; in the weeks after Mr Trump’s election, it fell by 7%.

If a strong dollar is cheered in Tokyo and Frankfurt, it is rather less welcome in emerging markets—for three reasons. First, sharp falls in currencies put pressure on central banks to raise interest rates, both to prevent further depreciation and to contain the resulting inflation. Turkey’s central bank raised interest rates on November 24th in response to a fall in the lira to an all-time low against the dollar, for example.

Second, a stronger dollar also has an indirect impact on credit conditions in emerging markets. A study by Valentina Bruno of the American University in Washington and Hyun Song Shin, of the BIS, found that those emerging-market companies able to borrow in dollars act like surrogate financial firms, lending on a chunk of borrowed funds at home. When the dollar was weak, such firms borrowed freely in global markets. A strengthening dollar, in contrast, causes a general tightening of credit in emerging markets.

A third effect comes from the legacy of past dollar borrowing. As firms rush to pay off their dollar debts, which loom ever larger in home-currency terms, they are likely to cut back on investment and jobs.

The impact of a stronger dollar is evident in rich-world finance, too. A shibboleth of finance is that foreign-exchange markets follow “covered-interest parity”, which says the forward rate should reflect the current (or “spot”) rate and the gap between interest rates on each currency. Otherwise an arbitrager could simply buy a currency today, lock in the forward price, pocket the interest and still take a profit when the forward contract is settled. The interest-rate gap implicit in forward markets should be zero. For dollar-yen contracts in three months’ time it has blown out to almost 0.9%. That means firms and banks are paying far more than is normal to buy dollars with the currency risk hedged (see charts). The cost of hedging seems to rise with the dollar’s ascent.

Parallels have been drawn with an earlier period of sustained dollar strength. The dollar’s 50% increase between 1980 and 1985 was brutal for America’s exporters. The pressure for higher trade barriers was only defused by the Plaza Accord of 1985, a rich-country pact to weaken the dollar. The biggest concern about the latest dollar rally is that it will spur not agreement but conflict. Mr Trump seems all-too eager to resort to protectionism in a misguided attempt to balance America’s trade. A stronger dollar might be the trigger for such a disastrous move.

This article appeared in the Finance and economics section of the print edition under the headline “The dollar squeeze”

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This Is How You Profit on the U.S. Dollar, No Matter What

This expert insight from Tom Gentile originally ran in Power Profit Trades on September 11, 2020

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A few weeks back, I predicted that the U.S. dollar would become even more volatile heading into September.

And that’s exactly what’s happening.

In fact, it fell again Sept. 8 for the sixth month in a row – the longest declining streak in 14 years.

This is extremely important because the price of the dollar can affect anything from the price you pay for a gallon of milk to the value of your 401(k).

But it doesn’t have to hurt you…

All you need to know is how to profit – no matter where it goes from here.

Where to Put Your Money When the U.S. Dollar Is Weak – and Strong

President Trump shocked many when he said the U.S. dollar is too strong. He said this back before his inauguration and was referring to China’s valuation (or in his words, “manipulation”) of its currency, the yuan, when making these comments.

What shocked so many people about his statement was the common belief that a strong dollar is a great thing. But keep in mind that it’s not necessarily a win-win situation for everyone. That’s what can make the mainstream media’s coverage of the price of the dollar so hard to digest sometimes, like how a weakening dollar can account for a spike in oil prices.

So let’s talk about the basics…

A “strong dollar” allows the United States to buy more goods from a foreign country. This can be good for Americans who buy foreign products, like electronics or pharmaceuticals, because it costs less to buy them. On top of that, a strong dollar benefits those traveling overseas on business or vacation because it’s less expensive to travel and pay for lodging, food, and transportation.

On the flip side, a “weak dollar” means that the United States can’t buy as many goods from a foreign country. In turn, it becomes more expensive for Americans to pay for foreign products and to travel abroad. That’s because there’s less purchasing power than with a strong dollar, so Americans are left to make up the difference in prices on imported goods.

But there’s a good side and bad side to both scenarios…

When the dollar is strong, we can buy the things we need and want for less, which means we can get a lot more bang for our buck, so to speak. However, it costs more to manufacture U.S. goods overseas, which could affect the ability to sell these products. This could eventually lead to shrinking margins and, therefore, shrinking profits. And that could ultimately result in lost U.S. jobs due to halting, shutting down, or moving operations to another country altogether.

A weak U.S. dollar is often considered a bad thing because of the higher costs to export goods and services, especially overseas. But a weak dollar can be good in that exports can sell for much more. And the more that American companies can sell their goods at higher rates, the better the impact on sales and revenue. This not only keeps the companies in operation – it can also lead to growth and more jobs. And job creation is a great thing for the stock market.

Fortunately, there’s a way to invest – and trade options – in a strong and weak dollar environment…

Collapse of the Dollar and How to Profit from It

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The dollar is in trouble. Its value on foreign exchange markets has been falling for the past six years, and now its gradual decline is about to become a rout. This spells big trouble for the American economybut potential riches for smart investors. In The Collapse of the Dollar and How to Profit from It, financial gurus James Turk and John Rubino show how the dollar arrived at this precipice, why it will continue to plunge, and how you can profit from the resulting financial crisis.The United States today is the worlds biggest debtor nation. To finance this mountain of debt, were flooding the world with dollars. The resulting oversupply of dollars will cause its value to decline until it is displaced as the worlds dominant currency. Precious metals will soar in value, and gold will reclaim its monetary role at the center of the global financial system. James Turk, a leading gold authority and the founder of GoldMoney.com, and John Rubino, editor of the popular Web site DollarCollapse.com offer strategies for investing in gold coins, gold stocks, gold-based digital currencies, and other hard assets to create a profitable portfolio. The Collapse of the Dollar and How to Profit from It is a must read for every citizen and investor.From the Trade Paperback edition.


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Buy or Sell: EUR/USD Stares Down A Big Week

-Huge event risk this week with ECB monetary policy statement and the US jobs report

-Bullish patterns suggest a minimal move back towards 1.08-1.09

– On Balance Volume and Sentiment readings suggest a mature trend ripe for a reversal

For those who don’t closely watch the FX markets, this is a big week for the EUR/USD and a big month for the US Dollar Index. On Thursday, ECB President Mario Draghi will provide a statement regarding the ECB’s monetary policy. Economists are expecting a sh ift towards expansion of the QE program which could weigh heavily on the EUR.

Additionally, we have the US N on- Farm P ayroll report coming out on Friday. One month ago, the NFP report was a surprise to the upside which fueled additional expectations for a Fed rate hike coming up December 16.

On the one hand, you have a central bank (ECB) which is leaning towards more easing. On the other hand, you have the Fed contemplating when to raise rates. FX traders love diverging monetary policies between two central banks as it can create strong trends. This is in large part why the EUR/USD has sold off aggressively for the past 5 weeks. However, these fundamental stories have yet to unfold and even if they do, is this the beginning of the trend or a buy the rumor then s ell the news type of trade?

As we look through the technical patterns, it appears the higher probability move is for a couple hundred pips of US Dollar weakness. This could send the EUR/USD higher towards 1.08-1.09.

Using Elliott Wave Theory, we will cover a bullish pattern and bearish pattern with consideration to key levels to watch. Bear in mind, we are in a time of year where liquidity is thinner and news volatility can create riskier environments for traders. Consider market range orders that can limit the amount of slippage on trades.

Bullish Scenario – Completion of the Ending Diagonal

Until November 18, 2020, the moves lower have appeared impulsive. However, the sustained move below 1.0615 has occurred in sloppy over lapping waves. As we pointed out in Monday’s US Opening Bell webinar, one pattern we keep an eye on in that situation is a diagonal pattern (image 1 above). Since the diagonal is appearing towards the end of a long move lower from August, we believe it is taking shape as an ending diagonal pattern. This pattern typically retraces to the origination which happens to be near 1.0830. A move above 1.1090 suggests the correction lower is complete with a likely retest towards 1.17 down the road.

Bearish Scenario – Wave iii of (iii)

A break below 1.0440 would leave the chart as labeled in Image 1 as incorrect. That is because on an immediate drop below 1.0440, wave iii would be the shortest of waves i, iii, v which is not allowed under Elliott’s rules.

Therefore, we shift the patterns towards being in the middle of a wave iii of (iii) lower. Since 1.0440 is the point of invalidation for longs, a stop and reverse order could be considered near there.

Of the two patterns above, the higher probability pattern is the bullish scenario of an ending diagonal that may have already completed. Not only is this an ending pattern in Elliott Wave Theory, but other conventional readings are suggesting this trend has matured and is ripe for a reversal higher.

On Balance Volume (OBV)

Created using Marketscope charts

First of all, the On Balance Volume indicator has not been falling in line with the price drop. This creates a non-confirmation where price is falling and the indicator remains supported. Typically, we would like to see a sustained break in OBV and that hasn’t happened. We did just finished up a holiday week in the United States and volume is likely muted this week as well while we await the ECB announcement on Thursday and NFP on Friday. Despite those seasonality’s, this non-confirmation has been in place for 5 weeks. October 23 is when price broke below the early September lows yet OBV is still at the same levels it was in early September.

In looking at DailyFX’s Speculative Sentiment Index (SSI), we have seen the number of short traders grow while the number of long traders has held steady.

Notice on the chart above how the red line is drifting higher. As we write, EUR/USD SSI just flipped to negative -1.0001. This renewed interest in traders wanting to short EUR/USD is a bullish sign. Use our live SSI reading as a guide while the ECB news is released on Thursday and Friday. If the SSI reading moves lower and into negative territory, that would be a bullish sign. If the SSI reading moves higher, then that could lead to further losses in the EUR/USD.

Based on the patterns, OBV, and SSI, it appears the higher probability move is back to 1.08-1.09. If that move takes place, then keep an eye on 1.1090. A break above would signal a larger move higher. Otherwise, bears can consider sharpening their claws in the 1.08-1.10 zone. If the prices don’t reach 1.08, then a move below 1.0440 would signify deeper losses.

If you plan to trade the EUR/USD over the coming days, consider the impact of your trade size. Our research shows that when tweaking your effective leverage, the number of traders turning a profit increased from 29% to 40%. Page 10 of the Traits of Successful Traders Guide details it out [Free Registration].

—Written by Jeremy Wagner, Head Trading Instructor, DailyFX EDU

Follow me on Twitter at @JWagnerFXTrader .

See Jeremy’s recent articles at his Bio Page .

To receive additional articles from Jeremy via email, join Jeremy’s distribution list.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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