Just yesterday I mentioned about the talks between US and China, which were to include economic session. My contention was that USD would probably show some strength at the outcome of the summit. Same for Japanese Yen. Why? While both countries criticise each other at almost every possibility and pursue different agendas, during direct meetings they normally show “united front” on whatever is the topic of the month. That is why release positive for the dollar could have been expected. Of course, next week, or whenever Chinese officials will meet with Russian counterpart, USD negative announcement will be made. Go figure, but that is what keeps currency traders on their feet.

Speaking of the US Dollar, last month I read an article somewhere about safety of our currency. I don’t remember where it was or who wrote it, but a line got stuck in my mind. Article concluded the the green back is “backed with a smile. Of the nervous kind”. Or something like that. For whatever reason I found it humorous and shared it with a friend of mine, who is also a full time trader. His trading is much more rounded, not like my limited Forex speculation. he is also much more heavily oriented in fundamentals. When I told him that USD is backed by “nervous smile” he said to take a closer because it is a “shitty grin, not a smile”. I couldn’t stop laughing.

Chinese delegation was not that direct, but expressed their own concerns. Safety of their assets, the dollar holdings, was mentioned again, as well as hope of seeing US federal deficit diminish over time. This one could hard to achieve, given projections for budgetary hole for at least a decade forward. Another important point is eventual withdrawal, or recovery, of financial stimulus. This is important for both countries, especially considering amount of money involved.

Here is a comparison how much major economies have spent in bailouts and other incentives. One can see that Chinese stimulus was truly colossal, if expressed in terms of GDP%. Does it put them in a more precarious position when compared to US? Probably not. There are major differences between them. In the USA, the stimulus is being financed with borrowed money, despite the fact that debt as %  of GDP is already the highest among compared economies. In China, for a change, it is being paid for out of huge cash surplus, not causing additional long term financial burden.

So, summit came to an end with smiles and handshakes. Both countries praised each other for taking active step to combat global recession. When I saw the smiles I couldn’t help myself but to recall what dollar is backed with. And then it hit me. If Chinese keep buying our securities, our dollar will be, in practice, backed with Renminbi. That’s why everybody is grinning to cameras, fulfilling what my buddy joked about.

USD is not not the only currency benefiting today. Japanese is also making a run. Or a stand, depending on point of view. Most of the crosses made big moves, which could be a first leg in a few days long sell off. Even some of the high flying currencies of late, CAD and AUD suffered losses. I caught small gains in their respective JPY pairs, and now will take a look at another one.

Yesterday I suggested a trade in NZD-CHF, which didn’t happen. This trade is cancelled and I will try a sell in NZD-JPY. My plan is to wait for next low to form on 1H chart, at which point I’d like to place an order just under it, with an objective of 60.90. Also, if the price rebounds sharply, another sell order is currently placed  at 62.80. This entry would have very small risk above previous high. Right now the problem is that the low is not yet formed. Depending where( and if) this happens, that entry might be adjusted lower, by 30 pips or so.
Buy order in EUR-CAD is still valid.

Mike K.