- New Science in old markets -

The dollar and the debasing currencies

There has been more chatter lately about the 'competitive devaluation of currencies. This all started with an obvious side-effect of QE which is that printing more of a currency will reduce its value compared with others. This has led more recently to the widely-aired theory that China is also trying to devalue its currency and so the topic is hot again.  The main beneficiary is supposedly going to be the US$ where QE is a thing of the past, some small interest rate increases are already in train and Japan and Europe are also suspected of deliberately trying to engineer some weakness for their currencies. Maybe this is true.

We rely instead on signals and now there are two more that might indicate that the $ will indeed strengthen. The first shown here is a $/Yen bottom extension from last week that was more about excessive Yen strength than it was about $ weakness - the Yen firmed into extensions against several other currencies too. We sold it in the January 5th edition, choosing to sell the Yen/buy the $ instead of selling Yen/£ or Yen/Swiss Franc which were the other options. Bullish $ point #1

The $ index has now compressed and so has the $/Euro. Both these compressions seem to be breaking in the direction of a stronger $ today, although it is too early to tell if there will be a closing break by day-end (or even a re-compression). If there is a break, these will be bullish points 2 & 3 for the dollar. The chance that this offers to adopt a second or even third $ long position could be significant as the pent-up energy in such a bullish situation is palpable and the market has yet to move much. By all means anticipate the break if you wish but it is probably wise to wait a little longer as the day develops to make sure there is no price reversal back up through these compressions. Charts:

Yen, €-$, $ ind