The USD has surely been the world's favourite funding currency over the last 4 months, as it is yielding nothing. Positioning has changed massively during this period, by now hardly anyone outside the US wants to hold USD. If you ask TMN, having enough USD still buys anything on this planet which is why TMN refuses to see the USD as the single worthless paper currency of the world. The others are by no means any better or worse, momentum, short term policy decisions and yields are the factors that are driving these markets. It took the market a while to get on this USD down move which is probably why it unfolded in such a violent manner. However, TMN is seeing signs of a reversal here. For now it might be only a counter trend bounce but it could be one worth playing.
TMN's reasons are of various nature:
1) USD longs have had a very hard time lately, there are probably not many left, slow moving real money has switched into all kinds of currencies simply for the better yield, short term players most likely have enough of getting their fingers burned on a daily basis.
2) Yields, especially the long end, have been rising over the last few days and look like they will keep doing so for a while (see the older posts below).
3) US Banks will come in raising USD denominated equity at an increasing rate again, as the FED will disclose 2007-10 emergency lending to banks in detail on December 1st. Be sure speculators and their creditors will not get bailed out one more time. Politicians love their own job too much to deal with an angry public. Besides, bond market pressures are likely to force them to narrow down the "too big to fail" group to the inner core (Long JPM/Short GS could be a good pair trade from here).
4) The EUR failed again at 1.40 on several occasions today and TMN thinks given Mr Weber's comments the other day the EUR should be trading way above 1.40 if the USD sell off was meant to continue.
5) QE2 has been priced in to nuclear extent. Let's not forget that the "others" are money printers too, as the BOE has reminded us over the last weekend (see GBP related post below). ECB tough talk does not stop them to lend against collateral of very debatable quality after all. If it blows up in their face it will get monetized in one go and all the tough talk goes straight down the toilet. Mr. Weber might just make it into the ECB hot seat before that...
6) The technical set up shown below on the weekly chart (as per today's close) is hard to ignore. Admittedly these set ups occasionally get blown away by strong trends when they appear on shorter time frames but on weekly charts they are somewhat harder to take out.
click on chart to enlarge