The US Dollar has had a huge run against almost every major currency and commodity but speculators have to exit positions some time, so a host of psychological big round numbers (BRN’s) across asset-classes may be a reason to suspect that time is now.
In summary:
Fundamentally, the case for a strong dollar is still solidly in place. As demonstrated by the strong 248k jobs growth in September, the US economy is on the up while global competition from the likes of Germany and China appear to be headed in the opposite direction.
However, with the US dollar having moved so far so fast, there may be some reasons to believe a correction could be around the corner.
EUR/USD (1.25)
When EUR/USD was at 1.40, the highest level since 2011, ECB President Mario Draghi was concerned the exchange rate was negatively impacting the rate of inflation in the Eurozone and began referencing extraordinary monetary easing.
Now that the euro is heading toward 1.20, the level in which Draghi said he would do “whatever it takes” to uphold the Eurozone it seems likely he will not be talking the currency down or introducing a full quantitative easing program in the foreseeable future. No euro jawboning and no QE would remove a lot of the reasoning behind euro weakness.
GBP/USD (1.60)
The Scottish referendum and the associated uncertainty have been and gone and despite a recent slowdown, the British economy is ticking along nicely. By many people’s estimation, the Bank of England will in fact hike rates sooner than the Federal Reserve albeit possibly at a slower pace.
The assumption of a slower pace of hikes in the UK could be misplaced; there is a strong correlation between the strength of the pound and the UK’s consumer price index. The very fact that the pound has come down as much as it has, could mean an increase in import prices and see UK CPI tick back above the Bank of England’s 2% target. Higher inflation would put pressure on the central bank to hike rates and as such be a positive for the pound.
USD/JPY (110)
The Japanese government have targeted a weaker yen as part of Prime Minister Abe’s ‘Three Arrows’ to bring the Japanese economy out of stagnation. However recent comments from officials suggest the government is a little concerned over the pace of the declines in the yen and the impact it could have on importers as well as confidence in the economy.
Current price levels for the yen likely already reflect any economic slowdown associated with the sales-tax hike so if Bank of Japan governor Kuroda decides to hold back on additional easing, further yen downside could be limited.
Gold (1200)
Yesterday was the third test of $1180 per oz. for gold in just under a year and a half. US GDP growth was very strong in Q2 but that is arguably an inventory build-up after the weakness of Q1.
If Q3 growth shows sign of slowing and the Federal Reserve remains dovish especially if they keep the “considerable period of time” comment in their statement, the lower probability of a Fed rate hike could see gold recover as an inflation-hedge. It’s also always worth considering that a major geopolitical flare up with lasting consequences on global trade, perhaps involving Hong Kong would likely see a renewed demand for gold as a safe-haven.
Crude Oil (90)
Slowing growth in the Eurozone, China and perhaps soon Japan have seen expectations for oil demand diminish but should stimulus implemented in Europe and China improve the economic prospects of those economies, expectations for global demand could pick up.
Another distinct possibility with lower oil prices is an OPEC intervention to stabilise the market. If OPEC members, particularly Saudi Arabia decide to cut production, the supply-demand imbalance could even-out and further oil price declines may not be justifiable.
Conclusion
Investors will anchor their decisions around certain numbers even though they don’t necessarily mean anything about the investment at hand.
One example an investor will base decisions on is the price the investor bought the asset, even though this price level is likely unknown and meaningless to the market as whole.
Another example is big round numbers like 1.25 and 1,200; it’s at these levels that investors will reassess if the reasons they initially bought or sold are still valid and make a decision on whether to close the trade.
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