Despite better than expected TIC data – US investments hit $114b – a level not seen since May this year, the US dollar has not risen against the euro and pound by as much as i would have expected. Even though this data lags by 2 months the numbers can affect trader sentiment and if this trend were to continue would be very positive for the dollar over the next few month. Ironically, the biggest gain for the dollar was last Friday, when core cpi figures came in higher than expected, thereby reducing the Fed’s scope for further drastic cuts in interest rates.
However, just as the dollar appears to be finding its feet the Wahabi religious establishment of Saudi Arabia has just issued a fatwa against the US dollar.
The dollar peg is something which will dominate the currency markets in the new year as the economies of those countries linked to the dollar begin to suffer further rises in inflation, higher food costs and ultimately greater political instability. The irony that the fundamentalist clerics of the Middle East and Lenin should have so much in common inasmuch they both believe that the best way to “destroy a capitalist economy is to debauch the currency”.
In the short term, thin holiday markets make any trading extremely difficult but I would suggest that shorting the GBP/USD looks a reasonable trade in the next few days, but be aware of support at the 1.9850 area. If the pair penetrate this area then expect lower prices to follow.
Personally i am waiting until Friday which is triple witching or freaky Friday, a phenomenon which only occurs four times a year on the third Friday of March, June, September and December. The markets are always extremely volatile in the final hour, as traders quickly close or offset their option/futures orders before the closing bell.