The USD continues to strengthen. It has spent most of the past two years consolidating, and there is a lot of speculation that it is finally coiling up for a directional move.
The chart is beginning to say it is going up. Are there any fundamental reasons for this?
You could argue that it now looks as if Clinton is going to run away with the U.S. Presidential election. She is seen as a “business as usual” candidate and very friendly to Wall Street. So it would not be a surprise if her election victory, or prospect of such a victory, is greeted by a strengthening greenback.
Once the election is safely in the bag, the Fed can raise rates if it dares (excuse my cynicism). It would be amazing if the FOMC release due tomorrow was anything but just the same as it was last time (bullish on a hike soon but no actual promises). The expectation of a hike is bullish for the USD, and an actual hike itself if and when it finally comes should be bullish too. Of course, it may make a fairly fragile stock market react badly: that is the concern.
As I’ve said before, it is not so much that the U.S. economy is doing very well, but more of a situation where its doing better than any other significant economy.
Taken together these factors make me think that barring any upsets or sudden market drops, the USD has the strongest case for a bullish move over the coming months.
The question of what to be short of against the USD is more interesting.
It is not often that currencies make record prices and rapid and sustained breakaway moves. Yet right now, there are two currencies whose behavior fits the description: the British Pound, and the Turkish Lira.
The British Pound made a 31-year low last week. Everyone knows why: the government is really determined to leave the European Union quite soon and it looks as if nothing can stop that happening. There is major uncertainty now over Britain’s economic prospects. Pro-EU forced have talked up the economic consequences so greatly that there is much fear as to what will happen next. The fall may not continue, but the odds today are that it will, and there is no telling how much further it is going to go down.
The Turkish Lira is also making really record lows. Turkey was recently described as a “political basket case” by a leading Turkish economist. The country now appears to be arriving at a period of authoritarian rule with no end in sight, and there is plenty of fear as to how that may turn out. In any case, the country’s economy is very heavily dependent upon foreign capital, and that plus the instability equals a seemingly endlessly weakening lira.
Strong Forex trends are few and far between, but when they do arrive, if you have bravery and patience, it is possible to make a very high return taking only a relatively small amount of risk.