The last of the Dollar Sellers

As the first trading month is now well underway its got me thinking about what now for the USD, given the amount of unwinding we have seen in the USD positions in December, it has me asking myself was this the correction the market had to have or a serious shift in sentiment and positioning. Its worth noting that December flows in thin markets can be very unreliable.

In 2010 it widely accepted now that the Carry trade will return to the yen and once again it will be the funding currency of choice and the Bank of Japan, any Minister in the Japanese Government remotely connected to the finance ministry is adamant that interest will not be moving from close to zero for some considerable time, given this situation money always follows yield, so lots of investors will borrow lots of yen and buy higher yielding assets making sure that a buy of dips in the yen pairs will be a solid trade throughout 2010.

In 2010 there is now clear signs in the market that traders all over are preparing for a stronger USD this year, some of the evidence that should continue to become clearer includes:

• US Bonds both two and ten year seemed to have created a bottom and technical analysis of this would suggest a first leg up for the bond price if sustained.

• The oil price has shown real reluctance whilst in the early 80's it seems to run out of buyers quickly at these levels and is quickly pushed back down.
• Gold has profited and suffered in the hands of the emerging nations, aggressively bought in 2009 as a hedge against other investments, this year so far it has struggled at lofty levels and at time of writing was hovering around 1128 and looking weak.

Most times when the Federal Reserve wants to let the market know they are thinking of putting rates up, it starts with rhetoric first, then we may see extraordinary measures such as the purchasing of Mortgage Backed Securities cease towards the end of quarter 1, then a pause and nothing for a month or two, as the federal reserve will want to make absolutely sure they have the timing right, and then in Quarter 3 this year the first small possibly 0.20% rise will come.

This rise and the lead up to it should be enough to make traders all over start buying dollars rather than selling them. The interesting piece of this action for me is what happens to China when the rates go up as the Yuan is pegged to the USD so any rise in USD will ultimately push the value of the Yuan up as well, it will be an interesting space indeed.

Good luck as always