Forex Investment and Currency Trading

1 – 3 Month Outlook: Looking for a bottom

The next 1-3 months are critical for USD as the intense challenges facing the US economy are coming to a head. The Federal Reserve, and its global central bank partners, might have done enough to avert a financial calamity, but it is no time to declare victory. Instead, the Fed has to quickly turn its attention back to the intense downside risks from the housing market on the broader US economy. In particular, the sharp decline in US home prices continues unabated, present a distinct downside risk to US household wealth, which has been boosted by buoyant housing prices in recent years. This has clearly weighed heavily on US consumer confidence. The Conference Board’s confidence measure tends to be more sensitive to the broader macroeconomy, so its slide to 64.5 (cons: 73.5) in March clearly reflects the nervousness of consumers, who represent almost 72% of the US economy. The US economy thus still faces clear downside risks, and the Fed is struggling to manage these risks as its efforts to kickstart an economic rebound are not having any traction yet, as the financial sector has absorbed the liquidity injected rather than passing it on to Main Street. So long as these concerns are dominant, USD continues to face downside risks. That said, the steepness of the US yield curve does suggest
that the worst is hopefully almost over, setting the stage for a USD recovery that might begin during Q2. And, starting in early May US$600/person, US$1200/family cheques related to the stimulus package will start arriving.

6 – 12 Month Outlook: Expecting a Rebound

The 6-12 month outlook is for USD to enter a sustained upturn after a more than 5-year bear market. The shape of that recovery will depend critically on the Fed’s success in bolstering the confidence of the US consumer ensuring that the downturn is as short and shallow as possible. The presidential election to be held on Nov 7 presents a challenge to a rebound in sentiment. The Democrats will pounce on economic weakness to try to wrest control of the White House particularly if the race for the Presidency stays close through the Summer. This risks sparking an increase in protectionist rhetoric in the US, although this will likely only to increase the choppiness of an expected USD rally.