Dollar still predominates foreign exchange reserves, says the Fed, but questions whether Chinese Yuan is behind the dramatic rise in – what IMF reports as – “other currencies”.
“After accounting for all of the traditional reserve currencies, however, the IMF lumped 7 percent of foreign-currency reserves in an ‘other currencies’ category—an eye popping amount. Usually, this ‘other currencies’ category amounts to only 1 percent or 2 percent of the total,” note Cleveland Fed authors.
Is the Yuan the dominant in this “other” category? Not clear.
“A rise in the ‘other currencies’ category gained almost as much as the dollar lost. The IMF does not report the currencies in the category, but the Chinese renminbi seems a likely candidate,” say authors.
Back in 1995, US dollar constituted well over 70% of foreign exchange reserves and after steady decline it is at 58% as of 2011. While British pound and the Yen stayed rather flat, the Euro was grabbing share of those reserves.
“Making a jump from the dollar to a new international currency requires a substantial portion of people to switch in close concert; otherwise the network benefits are lost,” reminds Fed.
The reserves trend since the 2007 Great Recession is clearly negative, a period during which the value of the dollar ossified… and that has many critics worried that the switch in “close concert” gets to be closer as the purchasing value of the dollar weakens to the point that all those holding it are convinced that they may be better off with another currency.
What isn’t clear is the lower threshold of the dollar that convinces its holders that an alternative is a better deal.
Despite dangling at the 20 DMA support, the action in the market has broken most of the good trading patterns. As a result, there are no compelling reasons to enter any trades.
As an example, PLCM has looked as the standard bullish-flag consolidation pattern until yesterday when the NASDAQ sell-off broke trader belief that the 20 DMA is support.
To see where support in the stocks is, if any, more waiting is required but during the wait a conspicuous dollar-yield divergence is once again sneaking up on the market.
During last year’s April-July market tremors, yields were dropping as dollar was rising. The dollar-yield X-formation highlighted in the chart is the result of falling yields and rising dollar that coincided with a rout in the stock market during that April-July timeframe. Fast forward to right now and dollar up, yield down is in a replay mode.
The dollar-yield divergence is not in standard economics which argues that currency value rises as interest rates go up, unless fear was descending on the market. Back then, the fear was Greece, but market almost never reacts on the same thing twice so what is it this time?
There was the muni-bond panic, the euro panic, the Greece panic, the dollar panic, the quantitative-easing panic, the inflation panic, oil and gold and commodities panic, the Japanese earthquake/nuclear-disaster panic, the Middle East panic, the S&P U.S. ratings panic.
To keep it current, we’re in the middle of the debt-ceiling panic and the International Monetary Fund sex-crime panic.
It is a well known that market rarely moves for reasons that media reports so that spells some respite for Strauss-Khan: him raping a hotel cleaning lady cannot be the cause of market fear.
What could price trends in various markets suggest to us as to where things are going?
Chart below is of copper and yesterday’s trading clearly broke below the 200 DMA and the next possible support is lower at 370 (then 340). The velocity of the price drop also suggests that the 370 may be reached fairly soon at which point any rally would look at the 200 DMA as a resistance level. Fibonacci retracement lines also support this view. Besides the dollar rally, there are also some fundamentals driving the price down, particularly high Chinese copper inventories and lack of credit there to fuel new copper purchases.
As oppose to copper which has a well defined price pattern, oil (WTIC) looks set for another $10 leg down and even there the price may keep drifting lower and into $70s.
As for the dollar, it is still not clear whether its recent rally is sustainable because both the 20 and 50 DMA momentum is down and the price is sloping down the long (200 DMA) price trend. So far, the dollar rally looks to have legs up to the upper Bollinger channel (about 76) which is also the short term resistance area made in November. This top may be reached fairly soon and at that point, dollar looks more likely to head down towards 72.
Some in the media are saying that the recent dollar rally is sustainable because of the anticipation that Fed will stop pumping money in June via QE2 thus ushering “quantitative neutrality”. Markets typically discount things 6-or-so months ahead, so this argument, month before QE2 ends, is little dubious.
Coal looks like its has placed a nice interim bottom, but its double top at around $52 needs to be taken out for this commodity to continue its upwards channel. There is lot of chatter about huge pending coal demand in Asia that can act as a catalyst for such a rally this summer. Two years ago, coal has seen bullish summer time price action while last year, coal held well during the summer sell-off and subsequently rose huge in the fall.
Of course, none of this is a perfect science, but sort of a suggestive guidance on possible price action to be expected, barring any black-swan events, which are increasingly turning white.