Strong Dollar

The dollar breaking its 50 day moving average on the 4th of December, has been a key day. Prior to this the dollar had mainly rallied on risk aversion, as a safe haven, and with better than expected non farm pay rolls of -11000, this led the market to bring forward their expectations of a rate increase, and thus the dollar rallied. Since then it has been consistently rallying off good news.

January the 8th is a key day, when we'll see if this non farm pay rolls was simply anomalous data volatility, or part of a reversal in the unemployment trend.

Obviously this is a key moment, as from historical perspectives of the Fed's decisions after previous recessions, market perceptions are that the Fed cannot begin rate hikes until there is evidence of an improving job market.

Also given that Ben Bernanke is a scholar of the great depression, and has stated that one of the mistakes in those times was increasing rates too soon, my own view is that remains will remain low for an "extended period" well into late 2010, and perhaps early 2011.

We are also approaching Q4 earnings season. And market perceptions are that the holiday sales went well for retailers, but will companies show "top line" growth, and not just savings made by cost cuttings? Is consumer spending back?

When I try and look at market consensus for these things, given I do not have access to my own research, data etc, what I look at is stories. Who's selling me the best story, that makes sense, that fits in with what the market is saying.

Long term my view on the US economy is doubtful. I think there will come a stage towards the latter part of 2010 or early 2011, when paying interest on their debts becomes a serious issue, and the Fed will keep printing money, people will lose faith in treasuries (to a greater extent they have now), yields go up as default risk is priced in, as well as a devaluation of the dollar.

However short term, I'm looking for a strong dollar, with support on the US dollar index at 74, and a near term target of 80, which could quite well be taken out on Friday, or earlier, as the market begins to anticipate Friday will show positive figures.

Another reason why I'm bullish on the dollar, for 2010, is that there are numerous problems within other regions, such as the Greece, Italy, Spain debt concerns, as well as those in dubai. Any additional unexpected news releases of this nature, (for example from Eastern European loans), is likely to bring the dollar up as a safe haven again.

Bearish view points on the US economy;

If I were to state a case for a bear it would go along the lines of Im looking for unemployment to get worse, " Im looking for 10.2%-10.4% maybe more in January (so the payrolls released in Feb), cuz although businesses can get credit now, there's no consumer spending, and with fears over healthcare reforms and stuff the employer cant take risks adding to his expenses.." Which is actually what I did say 3 weeks ago.

I could also say there are problems in commercial real estate, which if unresolved, could pose supply risk on the property market, cause prices to go down again, thus reduce consumer spending, and reduce the possibility of a near term improvement in the job markets.

Bullish (on the price of the dow):

Business driven recovery, unemployment is a lagging indicator, improving retail sales, top line growth set to resume, positive news in jobless claims. So much liquidity out there, it has to go up.

Given these two view points, my feeling is that the non farm pay rolls news on Friday is likely to be positive for the dollar.

Scenario A) Job losses low, in the region of -20000, to -75000, or even a slight addition in the number of jobs and the dollar rallies.

Scenario B) Although the dollar has been selling off, on bad news, I think that if the december results were shown to be an anomaly, and the losses were around -120k, or more, the whole market shakes up. And the dollar rallies as a safe haven.

So my feeling is that the odds are in favour of a dollar rally.