Currency Intervention in the Works?

Granted, it's early still and things can dramatically change.  However, Friday's action was concerning with the magnitude of the dollar move.  We've waited to see how early forex trading, the gold market, and the stock market began behaving before commenting....

There are two areas that bare close scrutiny, and possible concern.  First, again, is the magnitude of the dollar's move on Friday.  It smashed through the 50 day moving average, which has served as strong resistance since March, and we've technically seen a breakout above the 50 level on the RSI, which implies a possible bull market turn.

The euro and yen have taken a beating, but still show more downside potential.  Strong buying support for the euro will probably come in around the 1.45 level as a worst case.  There is support at the 1.46 level, but it is not as strong, and the triangle breakdown pattern points to a 1.45 level support.

The Bank of Japan is clearly not happy with the yen's strengthening over the last couple of years as a result of the unwinding yen carry trade.  There is more downside here, implying more upside for the dollar.

We usually avoid the conspiracy talk here, but in this case, it may be warranted.  It is our belief that we're seeing a coordinated currency intervention by major central banks, notably the Fed, the Bank of Japan (BoJ), and the European Central Bank (ECB).  The dollar has had extremely negative sentiment, but was not oversold in the big picture sense.  However, the yen was stronger than the BoJ would like, gold was higher than any central bank would like that was interested in buying, and if they're not buying, they definitely don't want a high gold price.  The ECB has been supporting the Fed for some time, and they are under considerable pressure to help the export markets.

What better time to strike than when gold is "frothy" and sentiment on the dollar is ridiculously negative (for good fundamental reasons, we might add...)?

Currency interventions are short lived events--typically.  None of these central banks wants to see a repeat of 2008 with crashing asset prices, so some care would have to be taken to avoid forcing a major deleveraging event.  However, some defense of the dollar would be valuable for all involved and a knock down of the gold price also benefits the entire lot.

Seem far-fetched?

Note that the correlation between rising asset prices and a lower dollar has fallen apart since Friday.  Most commodities held their values well.  Global stock markets held out well enough.  The only negative effect on such a currency move was against gold.  Typically we've advocated shorting the stock market when the dollar broke the 50 day moving average--as long as the correlation was present.  Since the correlation has been present since 2001, either the world is going back to the roaring 1990s (very, very unlikely) or something out of the ordinary is taking place...

Meanwhile, all of the fundamental indicators of credit stress are fine.  In fact, the TED spread was down on Friday, not up as one would expect with such a move.

Of course, we'll know more over time, but at this stage, we're sticking our neck out and calling this a coordinated currency intervention.  It has triggered some selling in the gold market by the weak hands, supported the short term Treasury market,  and lifted some export pressures in Japan and Europe, as well as punished the speculators (probably retail investors...) that were late to the dance. 

Interventions are short term, by definition.  After all, if central banks could control the markets for any period of time, gold would be free, there would be no economic problems in the world, and the banks would never have gotten into trouble.  At this stage, we're looking at the levels discussed on Friday for gold buying.  There is likely more downside, so the first target buy point is probably 1100, not 1130.  There's a bit more downside in the euro to come, and considerable downside in the yen.  The potential for a dollar rally up to 78 exists here over the next month, though we're not forecasting that quite yet.  That will definitely impact our Q1/2010 thesis with the dollar hitting 72 and gold at 1300.  We'll adjust that and provide updates as this situation unfolds.