Whilst the Trump administration recently confused and contradicted itself regarding the merits of a low or high value USD, many analysts and economists who will be close to the USA administration, as well as the FOMC committee members and their team of advisors, will know that the USA has to find a balance for the dollar versus its main peers. Without a doubt our forex markets, the globe’s largest marketplace, finds its true level based on all the activity and available information. This aids (what should be) frictionless global trade and commerce to take place. Part of the direct remit of a government and indirect remit of a central bank, is to foster conditions for a harmonious environment to allow business, at all levels, to prosper. Many officials who are involved in attempting to create such conditions know that maintaining such a balance, is a complex task to engineer.
The recent stock market selloff in the USA has been blamed on NFP jobs growth and wage rises beating expectations. However, to isolate this one reason involving jobs prosperity for such a fall is disingenuous and naive. A low dollar, causing the price of imports to rise significantly, has caused inflation to rise, it also inhibits the potential for the manufacturing renaissance Trump wishes to create, unless the USA intends to use only its own raw materials for production and manufacturing. The rise in import prices, in such a country heavily reliant on the service economy and consumers, has caused the recent spike in wage inflation (2.9%) and CPI inflation (2.1%). Analysts have quickly calculated that the trend for further rises is upwards; more costly goods due to a weak dollar, results in wage earners requesting more money for their labor.
The Republicans’ election campaign is now forgotten, the ‘make America great again’ through the implication of re-shoring millions of jobs and capital, opening up disused coal mines, revitalizing the steel and car industry etc, whilst engaging in a fiscal infrastructure spend not witnessed since the Great Depression era, is now a distant memory. Facts Trump the ideology, the false hope and the reality. Unless the FOMC raise rates considerably throughout 2018 then inflation will rise, wages will need to rise and the dollar’s status will slump.
There surely has to be certain red lines that the FOMC have to draw and the USA administration have to be aware of in relation to the value of the dollar, could it be USD/JPY at 100.00, EUR/USD at 1.2500 and GPB/USD at 1.5000 and USD/CNH at 6.0000?
Whilst these levels are arbitrary and unlikely to meet in perfect alignment, given the various correlations constantly in play, they could be areas that both, the USA administration in terms of their fiscal policy and the FOMC/Fed in terms of monetary policy, are already observing as levels which if met, dramatic action has to be taken, in order to protect the U.S. dollar and prevent inflation from rising to levels that will cause long term economic damage.
As Forex traders we can often be guilty of missing the bigger picture in relation to our markets and in particular the longer term values of certain currencies.
Many institutional level traders will invest based on their:
1. technical observations of weekly and or monthly charts,
2. the prevailing fundamental news and the COT report;
3. the weekly commitment of traders’ report, which reveals the positions that institutional level investors, hedge funds, banks and other large scale currency investors, have taken.
It’s only when we scale that out we can gauge the true picture of a currency pair’s movement, over an extended period of time.
