From the authors of Breaking The Buck, we now have the sequel - Burning It!
In the short run, this is going to stoke REFLATION. In the long run, the US Dollar's stature as the world's reserve currency will be dead. In the chart below, we have broadened the duration associated with this debate. Andrew Barber has illustrated our new long dated duration - we're calling this the "TAIL" line of resistance ($81.62).
You learn a lot about markets and their pressure points by watching what they do intraday. Yesterday was a critical day on this score for the US Dollar. In the face of heightened (realistic) concerns about an eventual rate hike, the Dollar rallied +3.5% from its recent lows (see chart). As the Dollar rallied, the REFLATION trade (globally) fizzled. We saw petrodollar markets like Russia and Saudi Arabia correct between 5-11% from their respective peaks in very short order.
Importantly however, the Buck backed off at the immediate term TRADE line of resistance ($81.36) and has subsequently started to break down again. If yesterday's intraday reversal of the buck's bid was important, today's follow through selling is critical.
As of 11AM EST, the US Dollar Index is down another -0.85% at $80.13. This is good for the anyone levered to the REFLATION trade. What has come down in the last few trading sessions, globally, is preparing to launch higher again.
Are there fundamental data points supporting this renewed crisis in the credibility of America's currency? Consider the following points of rhetoric that we're amplified in my notebook in the last 48 hours:
- 1. The IMF's Lipsky said a "new reserve currency is possible"
- 2. The World Bank's President, Zoellick, said "China may diversify"
- 3. Timmy Geithner is back on American soil, being YouTubed
The Buck Is Burning. Trade the implications surgically.
Keith R. McCullough
Chief Executive Officer