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stephan |
| 11-29-2006 |
According to the long-term charts the US currency is looking very oversold, particularly against the Euro and the Pound, and to a lesser degree versus the Swiss Franc. Against the Japanese Yen it looks more like it is in the middle of a long-term range. How likely is is to sell-off further?
Well, it seems that the imbalances in the US economy are finally coming home to roost. In the short-term the key to the next move will be the reaction of the asian central banks - if one of them blinks and starts to diversify their large US Dollar holdings the sell-off could soon turn into a rout as the others join in to avoid catastrophic losses on their holdings. This would entail liquidating their US bond positions, causing a fall in the US bond market and a corresponding surge in interest rates, further weakening the US housing market, and indirectly, the economy, further undermining the currency.
Higher interest rates would also make the switch of corporate balance sheets from equity to debt financing seem not such a good idea. The private equity bubble could burst as cheap funding evaporates, and despite falling equity prices due to the squezze on interest rates, the transferring of companies from the public to the private equity markets would grind to a halt.
So where is the opportunity in all of this? Well, on any rout to extreme levels it might make sense to buy US Dollars in the forward market, particularly against the Swiss Franc or the Euro where the carry works in one's favour. |
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