US Dollar on the move

As I ended my last blog on Wednesday (20th September), I was anticipating a higher move for USD across all major currencies. "Operation Twist" did not go down well with the markets. My take is, the Fed decision to sell the Short-term treasuries for LT bonds was already baked into the cake, much before it went official; instead, market was spooked by Fed's "significant risks" comment when characterizing the current state of our economy. Indeed, risks to the global economy are clearly high and slowdown in China and India, the engines of global growth, is a clear testament to the fact that things are not getting better.

So, backing USD to go higher was logical. Everytime risk sentiment takes a back seat, the major players in the financial markets start deleveraging. That's what happened. Although, I failed to short EURO (I recommended shorting Euro before Fed announcement but I never did go short, as it never hit my target of $1.38)it is worth noting that EURO lost more than 300 pips with great velocity and there just wasn't time to react. Also, the Australian Dollar (AUD) lost almost 500 pips.

Now, the question is, will the USD continue to go higher? I doubt it. Many funds and financial institutions are selling risky assets (gold and silver lost big, as margin hikes were put in place) and they are buying dollars to invest in US bonds ("go with the Fed" trade) and thus park their capital in safe assets. I think this "risk-averse" sentiment will dominate until EU takes some concrete steps in resolving Greece "default" situation and restores faith in the European banking system. Behind the scenes, I am sure, EU leaders and the major banks in Europe, are pursuading the Chinese, Japanese and all those countries with hefty foreign reserves, to invest in those banks that have significant exposure to troubled sovereign bonds. In its recent issue, The Economist, quoted that the major European banks, 38 of them, may need an infusion of $200 billion, to protect them from any possibility of Greek default. I just don't think, a mere capital infusion to "fill the hole" left by loss from sovereign debt portfolio, would do the trick; in fact, the psychological dent from a Greek default could be devastating and will ripple through the global financial system. It will be interesting to see how the world leaders manage this situation without precipitating a global crisis in confidence.

Having said all that, a mere wave of hand by Bernanke signaling another round of QE, in view of the continued crisis in the EU, would drive the risk assets again. The suddenn surge in USD buying will reverse in no time. Traders are ever on their toes, waiting for some sign of major rescue act on the part of US/EU/Asian authorities. When that happens, USD sellers will be back in full force.

These are extraordinary times in the Forex land. Those who don't follow the markets, tick by tick, can be wiped out in no time; stop-losses may help, but daily whipsaws can defeat a well-crafted trading strategy.

Be safe out there.