Hommes et Garçons
That Friday feeling! And not any old Friday, but one that all foreign exchange dealers fear...Friday the 13th.
I’ve spoken to quite a few of my friends and contacts in the global currency markets today - and without exception they’ve all reminded me of the dreaded day.
That coupled with the time of year we're in - grim autumn - and who can blame them for being twitchy?
History tells us that this time of the year lays claim to many "Black Mondays" and even blacker Wednesdays. God forbid an even blacker Friday! Now you may think that my anecdotal evidence is not relevant to making money from currencies. These things move up and down for huge fundamental and economic reasons – right?
Well just to put the record straight, I remember all the horror-story trading days of the last 25 years. I was at my desk for all of them - and believe me when I tell you the currency markets were just as hectic as any equity market on those days.
One small difference though. Unlike our mates trading stocks and shares, we never stopped quoting prices in the currency market – no matter how grim things got on Black Monday 1987 or Black Wednesday 1992.
"Hommes et Garçons" as we used to cry! That's the difference between the men and the boys in the financial markets. And currency traders...well...we like to think we're that little bit toughened up and battle scared. If you'd been trading Sterling when it crashed out of the European Exchange Rate mechanism 14 years ago last month.
What are hard-headed forex traders like me looking at now? For some time earlier in the year I was advocating a weaker US Dollar and a stronger Euro in the closing months of 2006. I had already called the move that saw the Euro break above $1.20 and trade as high as $1.2975 in the spring.
So consolidation and sideways movement that characterised EUR/USD between July and September this year was only to be expected.
But it turned out to be one of the quietest third quarters for many a year. Consequently, profits for many forex traders have been thin on the ground - and to make matters worse, many traders are now being forced to clear out of their long Euro positions. These were built up over the past few months. But once again the Euro has flattered to deceive.
Despite all the weakness of the US economy's fundamentals - its collapsing real estate prices, the slowing economy and the ever ballooning trade deficit - the US Dollar has once again rebounded, even as the US Fed has seemingly put further rate hikes on hold after 17 increases on the trot.
So the big question this Friday the 13th is this:
Just why is the Dollar coming back into fashion?
As I write this there is still good interest to buy Euros by certain central banks, most notably in Asia. Yet there seems to be even more supply out there in the forex market - hence the Dollar's rise versus the Euro.
EUR/USD has drifted lower to near 1.2500 where it currently stands. Cast a peek at the chart below, and you'll see the price of the Euro versus the US dollar since inception.
http://www.agoralifestyles.com//content/files//sg496807.gif
You can see that despite much water under the bridge in between, the Euro is really little changed from its starting point around $1.190 seven years ago. So quite simply, the recent bout of Dollar strength has more to do with disappointment over the Euro than with any crazy or mixed-up opinions of America's economic strength.
The Euro has failed to break above $1.300. That's left a lot of my colleagues and opponents in the forex markets holding weak positions in the Euro. Now it seems like they've finally thrown in the towel and quit the "Dollar Down" idea for a big loss.
And going back further into history...back almost as far as Black Wednesday in 1992...and the US Dollar recovered its shocking drops of the '80s only when Bill Clinton wrestled power from George Bush Senior.
Will history repeat itself with another Clinton succeeding another Bush? If I bet on political events, my money would be on Hilary in 2008.
And if she wins the US Presidency for the Democrats, then the strength the Dollar enjoyed around the turn of the millennium may well return.
That’s still a couple of years away yet, however. In the short term, $1.246 still holds as a key level in EUR/USD.
A breach below this level may yet see more towels thrown in by the superstitious Euro bulls. I'm not backing the end of "Dollar Down" just yet. But I'm watching that key level very closely.
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