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Dallas, TX
November 5, 2009, 08:00 EST |
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Dr. Joe Duarte's Market I.Q. |
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The Internet's Intelligence Digest
Intelligence, Market Timing, And Trading Strategy For Traders and Investors
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Dollar Decline Fueled By Central Banks
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What's Hot Today: |
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U.S. stock index futures were flat on Thursday morning.
Global markets were mixed overnight. Wall Street failed to break above
key technical resistance levels on Wednesday leaving the trading environment
uncertain.
Today's Economic Calendar:
- Monster Employment Index
- Jobless Claims 8:30 AM ET
- Productivity and Costs 8:30 AM ET
- RBC CASH Index 9:00 AM ET
- EIA Natural Gas Report 10:30 AM ET
- 3-Month Bill Announcement 11:00 AM ET
- 6-Month Bill Announcement 11:00 AM ET
- Treasury STRIPS 3:00 PM ET
- Fed Balance Sheet 4:30 PM ET
- Money Supply 4:30 PM ET
News For Thought
Pot On The Rise On Indian Reservations. According to The Wall Street Journal: "Mexican
drug gangs are cultivating marijuana on Indian reservations, a new twist in the
decades-old illicit drug trade between Mexico and the U.S., the world's largest
drug-consuming market."
Analyst: Interest Rates Will Rise Due To Fed Action. According to CNBC.com,
bank analyst Meredith Whitney who saw the subprime mortgage crisis before most
analysts recently wrote has a new worry. CNBC reported: 'The Biggest Market & Bank
Risk Over the Next Four Months, a long note on the importance of the Fed's agency
MBS purchase program, where she argues that uncertainty over when the program
will end (now scheduled for end of Q1 2010), and who the substitute buyer for
the Fed will be, means that "prices will go down meaningfully and rates will
go up meaningfully." She argues that it is possible the mortgage market will
again shrink notably: "We believe this represents one of the larger risks to
the banks and overall market over the next several months."'
Monster Employment Index Shows Mild Improvement. The Monster Employment
Index, a measure of online jobs showed improvement for the second straight month.
According to the company's press release: "The Monster Employment Index edged
up one point in October, indicating a mild pick-up in online recruitment activity
at the onset of the fourth quarter. Year-on-year the index is now down 20 percent
which is the most moderate annual rate of decline since October 2008." The report
added: "During October, online job availability rose in seven of the Index’s
20 industry sectors and in 10 of the 23 occupational categories monitored."
This is yet another indicator that suggests that Friday's employment report may
be somewhat better than the consensus.
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Dollar Decline Fueled By Central Banks
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Dollar Decline Expected To Continue
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It's possible that the U.S. dollar's decline may continue for
some time, as central banks are joining traders in moving away from the
greenback. According to Reuters: "Central banks with trillions of dollars in
reserves that are already stepping up euro and yen purchases will likely continue
doing so in coming years, driven by worries over the stability of the greenback."
At the top of the worry list are familiar issues, such as the U.S. budget deficit,
and the rising strenght of other global economic powers such as China. Yet, as
Reuters reports, it's not as easy, or as harmless as it sounds to sell dollars,
as "attempts to dump it would destroy the value of central bank portfolios." That
means, that barring any major external events, the decline should remain steady,
rather than precipitous. Yet, as in any market, anything can change, and it can
do so rather quickly.
In fact, according to Reuters, central banks are increasing their reserves in
Euros and Yen, more than they are dumping dollars. The wire service reported: "Barclays
Capital research showed that central banks that report reserve breakdown put
63 percent of new cash coming into their coffers between April and July into
non-U.S. currencies."
Indeed, the central banks are playing a dangerous game. By not buying dollars,
they are forcing prices down by default, without decreasing their actual holdings,
leading to a dilution of their holdings more than a reduction.
To be sure, there is a long way to go. Yet data shows that over the last decade
a major dent has been made in the dollar's role as the reserve currency. Reuters
noted that "International Monetary Fund data shows the dollar's share of known
world reserves has been declining since it stood at 72 percent in 1999, the year
the euro was introduced. As of the second quarter of 2009, it accounted for 62.8
percent."
Still, the data shows that there may an acceleration of the process ongoing as "the
second quarter was the only one in which central banks accumulated more than
$100 billion in reserves and put less than 40 percent into dollars, down from
a 70 percent quarterly average back to 2006."
A major problem for the U.S. is the effect of this reduction in reserves and
the dilution, as foreign debtors are seeing the value of their dollar holdings
decline while "Worries about record deficits, run up as the United States borrowed
hundreds of billions to stimulate an economy ravaged by financial crisis, has
further diminished foreign demand for U.S. assets, making it likely the dollar
will weaken further."
Even more interesting are the reports of central banks buying gold. According
to Reuters: "Taiwan, the fourth largest reserve holder, has said it is considering
buying more gold, while China said in April it had increased gold holdings by
75 percent since 2003. This week, India bought 200 tones of gold from the IMF
for $6.7 billion."
Conclusion
The current perception is that the dollar is weakening because traders are losing
confidence in its role as the world's currency reserve.
The fact that central banks are joining the market in diversifying away from
the dollar is also important.
The real question is how fast the dollar will continue to decline. So far it
seems to be doing so steadily, due more to central bank buying of other currencies
and gold than to dollar selling.
The fact that foreign holdings of U.S. bonds are extremely large, and that the
U.S. continues to pay its debts, makes it unlikely that huge dollar dumping will
happen any time soon.
That, of course, does not include the possibility of something extraordinary
happening. After 9/11, the dollar's rate of decline accelerated dramatically.
Know when to sell and how to make money when the market falls. Get a detailed
trading plan in your pocket. Read Dr. Duarte's All NEW Books "Market Timing For Dummies." and "Trading Futures For Dummies." The Trading Manuals for
All Seasons. Also Available As Kindle Books. |
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Market Moves - Stock Of The Day
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U.S. Dollar Bearish Fund (NYSE: UDN) Resumes Up Trend
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The U.S. Dollar Bearish Fund (NYSE: UDN) recently faltered, but
has recovered its upward bias.
Chart Courtesy of StockCharts.com
Persistently high U.S. deficits and rising national debt are
leading traders and central banks to buy other currencies.
And while dollar selling may not be very aggressive, the dilution
of dollar holdings by the increase in holdings of other currencies
has led to a decline in the dollar.
One way to play this trend is by using the U.S. Dollar Bearish fund. The ETF
short sells dollar futures and has risen steadily over the year, so far.
The problem with the fund is that although it has been a steady climber, it recently
had a hiccup leading us to move into cash in our currency timing portfolio.
The ETF has recovered some, and we are watching it for now as the employment
report, due out Friday, has the potential of being a market mover.
If there is an up side surprise, which we think is possible, given the private
market employment data that has been released this week, we could see a bump
up in the dollar.
If the report is worse than expected, we could move back into a short dollar
position. For now, cash, even if it's in dollars, is a safe place to be.
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