Yep - fundamentals again

Just some bullet points worth noting. Wish I could say that all these were original ideas, rather they are accumulated thoughts and interpretations from the research reports I sort through each day.

Let's take a look at the US dollar (Dollar Index, DXC) for a moment from an interest rate perspective and see how the implications are rather dollar bearish in the months, perhaps years ahead.

- Historically, when US growth falls below 2.0% the economy has had a tendency to slide into recession. Given that US growth was already sub-2% when the credit/liquidity crisis hit, it is easy to see why recession fears are growing along with aggressive rate cut expectations

- US short-term money market rates are expected to fall not just below Euro rates, but also G7 rates - shifting the US dollar from a yielding currency to a funding currency.

- This scenario has been associated with major turning points in EUR/USD. Witness the 2004 peak in EUR/USD at 1.3670 when the US dollar became a yielding currency.

- The US yield curve in general could also add to the dollars woes although at present the curve still trades above Euro curve with 10-year yield differentials still favoring the US

As I'm someone who has no 'economics' background, could you explain this in layman's terms?

Soon one might be able to do carry trades using USD as the source or borrowed currency, instead of Yen or CHF, especially as having lower interest rates relative to the other majors means a good chance of a downward spiral in the $.

great post dave, read it twice

Thanks for the post Dave, very interesting possibility about the dollar being a funding currency. Pretty scary too, especially on the Yen side of things where the carry plays major roles. I am shocked that I am finding an analyst's words convincing. It means you are very insightful or I am very sick, probably the former

Hm....the borrowed USD carry....scary thought.

So, on another note - where does that leave the "lower AUDUSD" theory if the yield differential is insanely pro AUD as it is?

I've got the AUD gaining vs JPY, CAD and EUR at the moment(haven't checked GBP and CHF)


As for the USDX - if we lose 78 (current low is 78.20) then there's a scary amount of "room" opening up again. But I don't have a good USDX history...only goes back to 2005.

If there's a better source for MT4 or any other decent free charting soft let me know please...


P.S. Fundamentals aside: I've got a 2 year USDX wedge squeeze being underway - which to me is worrying, since it makes me cautious mentioning chances for a new low that easily...usually there's a rather ugly and swift end at some point once these long term things are done squeezing/resolving..

Minimally cleaner version, just because I'm sick like that.

Has me worried - price HATES empty space.

And I am lacking more data.

What are the ramifications of the USD becoming a funding currency and how will this affect the dynamics of EUR/USD trades