Does the currently rally in US dollar show a paradigm shift?
The US dollar has recently been trading stronger. This trend started after the last FOMC meeting announcement on September 21. Most people have the impression that the strength has been due to risk aversion and it’s relationship to the US dollar. But it is possible that because the fed has not increased its balance sheet to stimulate the economy after QE2, and therefore not printing more US dollars, the currency might be fundamentally worth more. This relationship is especially apparent when we look at the CAD/USD pair. The Canadian dollar has benefited from the commodity inflation and it had traded above parity until recently. But on the fundamental level, in order for Canada to be competitive to the US in manufacturing, the currency has to be somewhere below parity. Companies in Canada have higher costs in pure dollar terms, such as wage costs, social taxation and fuel costs, just to name a few.
Given this relationship, we can see Canadian dollar trend down to USD0.93 based on the level before QE2.
The bottom line is that if the fed meeting was a paradigm shifting policy affecting the value of the US dollar to trade to a fundamental norm, it would be a time to purchase and reduce exposure to commodities.
Commodities on the other hand will trade down based on two factors:
- slow down in the world economy
- the speculative trade being reversed
Tomorrow, Germany will vote on the EFSF, the general expectation is that they will let EFSF pass, but with not definite details on the stability mechanism. However, if Germany has problem passing the plan, it will be negative to the Euro.
Therefore we would watch closely the US dollar pairs for the confirmed momentum change in the following days.
the US dollar
At Winflow Financial Group, our consultants help entrepreneurs with our experience. Tell us about your business or investment today and find out how we can help your business save money and grow.