The forex market is a comparative market: Why the dollar is strong.

(subtitle:  Why fundamentals are second to price)

I have been talking about comparing markets a lot lately.  Mainly because as a market rallies, fundamentals tend to line up to explain why and ofcourse as a market falls, fundamentals line up to explain why.  Understand that I am not *bashing* fundamentals but let me give it to you straight.  Fundamentals, like news, can be spun and it is spun.  It’s dizzying.<?php the_excerpt(); ?>

For every piece of positive news or data there is a negative bit or two floating out there as well.  It’s the process of “discounting” that tells us which is foremost in traders’ and investors’ minds. Discounting is what has been “baked into the cake” or already factored in.  This is most commonly done in expectation of the most likely outcome.  The markets are always forward looking.  I think this is why futures traders are especially well-equipped to trade any market.  We know that we’re not trading what the value of anything actually is but rather what it is expected to be in the future.  Think of price this way:  Most everything you know and everything you don’t know about the surrounding fundamentals has been to some is reflected in the price you see on your chart.  Charts plot market psychology:  fear and greed.  That’s what the value of anything reflects.  Uptrend, greed.  Downtrend, fear.  It’s not much more complicated than that.

When I say “comparative market” that means that one market is always being judged against another.  This means strength or weakness is based upon how it is doing against another market.  So that brings me to the U.S. Dollar.  Yes, the U.S. is printing dollars like we’re never going to run out of green ink.  Yes, the current 0.25% rates is very low, second only the Japan amongst major central banks.

There are plenty of “reasons” for the strength of the dollar but there are reasons for weakness as well, but the reasons usually come after the move…think about that. Prices will always show you the trend, short and long term, and it’s the ONLY way to determine what is currently being discounted into the market.  Frankly, the most you really need to know is whether the news and fundamentals being discounted are bullish or bearish.  Singling out particulars, unless these are data events, is very difficult and hit or miss at best.

I’ll go long term here (weekly) on this view of the dollar.

It’s up because by comparison the dollar is looking good compared to the pound and euro…and now even the yen.  I’ll talk more about the yen in my next post.