View from London: In Forex, It's Not a Bottom until You Hit Something

07/27/2017 2:57 am EST

Focus: CURRENCIES

Robert Savage

Partner & CEO, CCTrack Solutions

USD weakness means higher import costs, helps the Trump agenda for US jobs/trade, drives up commodity prices and makes many central bankers wary about “disinflation,” writes Bob Savage, CEO of Track Research in Thursday commentary from London.


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The focus today is on the USD and its extended weakness post a “dovish” FOMC where the market ignored the “relatively soon” balance sheet normalization and focused on the inflation “below 2%” driving down December rate hike risks to 40% and skipping September entirely.

This leaves the world with a weaker euro/U.S. dollar (USD) or perhaps more accurately a stronger forex everywhere else.

In technical terms, the focus is on the 200-week moving averages that are in play with the EUR, Australian dollar/USD (AUD), Swiss franc/USD (CHF), Canadian dollar/USD (CAD) and US dollar index.

Swedish krona/USD (SEK) and South African rand/USD (ZAR) already broke out from them. 200 weeks is 1400 days–not quite 4 years–but with holidays it’s a 5-year moving average. The euro/Swiss franc (EUR/CHF) is also at the 200-week and that is bringing some joy to the SNB, which managed to dump its EUR floor in January 2015 and slowly rebuild it on the “down low” and on the cheap in 2 ½ years.

USD weakness means higher import costs, helps the Trump agenda for US jobs/trade, drives up commodity prices and makes many central bankers abroad wary about “disinflation.” The ECB and the EM world will be key in their statements to understand the threat of the forex move on their recoveries and their inflation targets.

The next move for the USD isn’t going to be about the FOMC or the data in the US but about how the rest of the world deals with this 8% drop in 2017. There are reasons to think that the move may be overdone but with the summer season in full swing, most central bankers and politicians want to be on the beach rather than in the office–leaving markets to extend their technical momentum.

Remember it’s not a bottom until you hit something.

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