Week in FX Europe - Dollar Longs Enjoying The Ride

12/10/2014 07:33 AST

If nothing else, the forex space has found some of its lost mojo. Investors are now dealing with strong intraday volatility again and with volatility comes more opportunities. This is certainly a far cry from the countless days of rubber necking by investors. For too long FX moves were dictated by the respected Central Banks easing policies. The whiff of possibility that rate divergence from G10 members is on the horizon has the market trying to recalibrate their fixed income, forex, and equity holdings. Thrown in some geopolitical and growth concerns and we have a market that remains on tenterhooks with some obvious stretched positions.

Currently for many, the dollar remains the go to currency of choice for safe-haven, speculative and investment reasons. It's difficult and expensive to fight a trend. Now more than ever, both patience and discipline are a prerequisite for forex success, especially with market opportunities becoming more plentiful with deep price movement.

Stocks worst performance in three-years

The mounting concerns over the health of the global economy is about to cap off another turbulent week across the various asset classes. Equities remain on the back foot with many bourses about to close out their worst week in three-years, fixed income hovers close to record low yields, and the U.S dollar remains the investor's currency of choice. The 'mighty' buck is about to reclaim most of its losses seen following the FOMC minutes reported mid-week. It appears that despite the dovish commentary from the Fed members, the market seems unwilling to wholeheartedly make the case that the USD is overvalued at this stage - it remains the 'best of a bad lot' and is supported by fundamentals.

German problems cripple EUR

The possibility of a delay of rate increases in the U.S briefly benefited the "risk-on" scenario (stocks higher, steeper curve and profit taking on the 'long' dollar trade). However, investors are fundamentally alarmed by the fragile state of the global recovery and are reversing their enthusiasm for the 'risk-on' trade. The IMF downgrading its outlook for global economic growth, coupled with some horrid numbers out of Germany this week (factory output slumped -4% and manufacturing orders plummeting -5.7% on the back of EU-Russian sanctions) has helped to speed up the exiting of some risk-on positions being taken.

The EUR briefly saw daylight after the FOMC minutes, driven higher by 'long' dollar positions taking some profit. Nevertheless, the downturn in emerging economies combined with the Russian trade sanctions has caused a sharp slowdown to Europe's backbone - Germany. It's the eurozone's only remaining growth driver and obviously a huge concern for the ECB. To some, the dollar has rallied too far and too fast since July. The reality is that the greenback has found firmer footing mostly on the back of good data and a small change in the FOMC language. Nevertheless, this week's dovish FOMC minutes tried and has since failed to provide the spark for a 'long' dollar clear out. The fear factor will continue to support the dollar, Euro growth worries will support the dollar, rate divergence will support the dollar - currently the only thing that the weak long dollar positions should worry about is the fact that owning dollars is a crowded trade and crowded trades do suffer from whiplash from time to time. Expect the market to focus more on shorting the EUR on the crosses, a potential way of safeguarding against a dollar whiplash.

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