Monday, October 27, 2008

FOMC Lower. Dollar To Follow?

FOMC Lower. Dollar To Follow?

This week brings the FOMC rate decision, and the expectancy of another cut in the overnight lending rate from in the U.S. from 1.5% to 1.25%. There are some looking for a cut to 1% and many futures traders looking for a cut to 0.75%. Whatever comes the question really needs to be; when will lower Fed rates actually lead to lower mortgage and lending rates? With average mortgage rates pushing towards 6%, at a similar level to when Fed Overnight rates were still at 5%, there look to be no relief for U.S. consumers and mortgaged home-owners, and that may be the Achilles heel for the recent dollar rally. The move to the dollar has been in response to global equity markets falling, and the fact that without global inter-bank lending the safest place to be is in U.S. government debt, which like the mortgage rate has not dropped the 10 year Treasury yield in-line with Overnight rate cuts. That Usd appeal however may get questioned the moment that equities get bought on the strength of a new found confidence in the financial sector, and the moment that the Libor rate, set by the British Bankers Association, drops and signals that banks are willing to at least start the lending process.

Interest rates have been cut globally, the next part of valuing a currency will be how much lower each region has to go, and which ones will be the first to show growth. It seems however that another cut from the Fed is not built in to dollar valuations, and if equities bounce higher sometime this week on the strength of a global adjustment to lending and fiscal policy that the dollar may see some selling as a liquidation of bonds takes place, and forward growth questions get asked. The fact that government debt levels in the U.S. have also been ignored, in the scramble to get under the Treasury blanket whilst the financial sector fall-out takes place, may not so easily be able to be ignored. It may not be a long-term equity rally, nor may it be that the dollar is fully liquidated, but equities look as oversold as the Usd looks overbought, and both were bought and sold on fear. Fear and greed work hand-in-hand, one is never too far from the other, as we have seen in the recent global finance melt-down.

Market sentiment is the most fickle of things, and the strength and conviction of equity sellers and dollar buyers may find a day this week that offers a stern test of the courage of their convictions. A stronger dollar is good for overseas holders of U.S. debt, a strong dollar however does nothing at all to help the U.S. economy in its battle to lower the trade balance and current account deficit. If the American plunge protection team is at work it may be that they will look hard at the day that comes when equities bounce higher and hold, because that may be the day Treasuries get liquidated, in just the same way that equities dropped. It may not be tomorrow, may not be this week, but for the dollar to hold near-term values may not be as easy as the climb up to these levels, a climb that was driven by pure fear. Greed may be the thing that counters the recent dollar moves; as fear disperses, greed will show itself once more.

The fact that the U.S. is holding so much debt may allow the dollar to move lower to test near-term support areas, with signals coming from oil holding around $65 a barrel, gold getting back above $750 an ounce, and equity markets trading two global sessions in the green. However small the gains are will be irrelevant for stock traders, just the ability to negate recent selling may be enough to move the dollar to near-term support.

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved.

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