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Currency Re-valuation Glass half full, or half empty?

Written by A Forex View From Afar on Saturday, August 16, 2008

It is pretty clear now the major economies- Euro-zone, Japan, US, Canada, UK and Australia, are heading towards a slowdown. In the last two weeks we have had the confirmations from all of them, culminating with the European economy having a negative quarter, lead by the German powerhouse. From a bigger perspective, the Japanese economy is still suffering from the last recessions and still has not totally recovered. The Australian economy has almost two decades of continued growth may help it weather the financial crisis and internal contraction with more ease. Canada will be reborn from the ashes once the U.S. economy expands and then resumes the flow of Canadian imports at the regular level. However, the UK and Euro-zone will probably suffer for some time it seems as the European consumers, known for their pessimism, may weigh on sentiment. The Bank of England and the ECB has stubbornly help onto interest rates in an attempt to contain inflation, and both now may be at least on hold for the foreseeable future, whilst the market goes about its business of re-pricing valuations just in case a cut comes.

The U.S. economy flipped from negative to positive in just one quarter and straight away some say the future looks brighter. The economy was helped in the last quarter by strong export industry, adding an important number of points to the GDP number; a stronger dollar may negate somewhat the export numbers for the rest of the year, U.S. exports just increased by the 6% increase in the value of the dollar index over the last two weeks. In particular, the second quarter positive GDP read was helped by the rebate check;, they did their job, but no more are coming this quarter. Some have even suggested, including Mr. Bernanke, that the tax rebate did nothing more than re-distribute the growth perspective from Q3 and Q4 into Q2 numbers. Another tax rebate, or tax cuts to encourage spending, will have negative long-term effects, the money has to get repaid from future growth prospects and the U.S. economic is already heavily mortgaged.

As the global economy slows, so will the US exports. In Europe there was a real belief that emerging countries would support the export demand side, but until now it seems there was not too much help coming. The future looks to be offering a phase of contraction, no matter what economy are we speaking about, the benefit that the U.S. has is that it has been contracting for eighteen months now, and may just be ahead of the game. Even so, there is a slight change the central bank’s outlook (that growth will pick up in Q4) may be too optimistic, just how they proved to be in the past.

The dollar has shown recent strength, but on a weekly chart this is nothing more than a test of a trend-line that has the dollar index locked in a short channel. If 77.00 breaks and holds this may turn out to be more than a storm in a currency tea cup, and this week of economics may well provide the answer. If the market buys the dollar at these levels it may signal a sustainable move, but we just have to be aware that going long-dollars may be a short-term trade that runs off momentum and near-term sentiment; take advantage of it, but do not over-commit to it.

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Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

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