Run on the Dollar?

Bernanke made dolorous comments yesterday about a slow recovery and added: “economic conditions, … are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” Karl Denninger at The Market Ticker captures the moment (see attached chart):

The market took about 10 minutes to discern that Bernanke’s “concern” was BS, and now has pushed in the chips – “all in” – breaking key support below 75 – and still going.

The carry traders have redoubled their bets and obviously intend to force Bernanke to either put up or shut up. … It appears the FX market intends to force Bernanke (and Geithner) to either defend the dollar or allow it to collapse.

Just look at the drop and the volume. After hours we saw a bit of a bounce but it has faded. The DX got down to 74.68, lower than Karl’s chart indicates.

The Forex view is well captured here: China scolding Obama prior to his visit shows that China is not about to be pressured by the US to let the RMB really rise. Instead they are pressuring the US to support its currency. Hence Bernanke’s remarks could be read as a reply in the negative, and now the FX market is delighted to play chicken with the US Peso. Who will blink?

Although the prior trading day was Friday the 13th, yesterday was a bit spooky in that the Euro and the S&P topped almost on the New Moon (2:14p ET), an odd moment highlighted in tonight’s STU. I see it as mere coincidence to Bernanke’s remarks.

It is nonetheless an oddity that markets have a two week cycle in tune with the Moon. We are not the rational Enlightenment creatures we make ourselves out to be.

More to the point, the wave structure is following what I outlined in Rally Scenario last Thursday: a wave 4, which has broken as a “spiky” flat, seems to have completed yesterday. A final wave 5 rally awaits over the next two days, if this view holds. For those waiting on the STU to opine, their prime count is that wave 5 completed yesterday; and their alt count is a flat wave 4 completed yesterday with a wave 5 to go. It seems that the STU was influenced by the New Moon too, and wants a nicely wrapped story that we peaked on the New Moon.

Astrological lunacy aside, it seems more likely we have play out the game of Dollar Chicken over the next few days, and stand aside for the Counter-Dollar rally in equities. The US Peso will wane while the Dow will wax. The Dow seems determined to get to 10500, a level I thought it would reach when I went bullish last November, although I thought it would happen faster (by the end of summer). The S&P will likely then reach its 50% retrace at Sp1121.

What happens after that depends on the Forex market and Dollar Chicken. The US Peso has become the Hot Tamale, with FX players knocking it around in a game of pol(l)o

About Duncan Davidson 228 Articles

Affiliation: NetService Ventures

Duncan is an advisor to NetService Ventures, where he focuses on digital media and the mobile Internet.

Previously he was at four start-ups: Xumii, a mobile social service based on a Social Addressbook; SkyPilot Networks, the performance leader of wireless mesh systems for last-mile access, where he was the founding CEO; Covad Communications (Amex: DVW, $9B market cap at the peak), the leading independent DSL access provider, where he was the founding Chairman; InterTrust Technologies ($9B market cap at the peak), the pioneer in digital rights management technologies, now owned by Sony and Philips, where he was SVP Business Development and the pitchman for the IPO.

Before these ventures, Duncan was a partner at Cambridge Venture Partners, an early-stage venture firm, and managing partner of Gemini McKenna, a joint venture between Regis McKenna's marketing firm and Gemini Consulting, the global management consulting arm of Cap Gemini.

He serves on the board or is an adviser to Aggregate Knowledge (content discovery), Livescribe (digital pen), AllVoices (citizen journalism), Xumii (mobile social addressbook), Verismo (Internet settop box), and Widevine (DRM for IPTV).

Visit: Duncan Davidson's Blogs

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