US Dollar: A Breakout is in the Forecast but what will be the Spark?

In the week ahead, the likelihood of a breakout is very high. Yet, there is a difference between a technical breakout and the development of a new trend. A technical break can develop out of necessity with speculation generating too much volatility to maintain such a constrictive trading band. In contrast, a drive that develops into a meaningful and lasting trend is a different outcome all together. The follow through on the latter scenario would call the official beginning of 2010’s trend for the US dollar. And, having already field-tested many potential catalysts already; it seems the only driver with the necessary influence is risk appetite itself. Through 2009, the currency was pushed into a steady descent as investors diversified away from dollar-based safe havens and in turn started to fund trades through cheap dollar-based leverage. Risk appetite waned into the final months of the year, however; and speculators have essentially waited for a sign to either add to positions or take profit for two months now. Someone could point out that the dollar and other risk-sensitive currencies have seen momentum since the onset of this lassitude; but that is merely the other fundamental interests coming back to the forefront – and ultimately the reason the dollar has been unable to establish a clear and consistent trend. To establish a true bearing and momentum, the dollar (and all currencies) needs a market-wide (stocks, Fixed Income, commodities, FX, etc) shift in risk appetite. And, the best fuel for such a fire is momentum behind sentiment itself. When such an effort is made, it will be more than obvious. All the asset classes will be moving on the same course and at the same pace; but it is probably a break from the Dow that will carry the most weight.

The influence of risk appetite – once triggered – cannot be denied. We have already seen its effects on the dollar; and they produce incredible opportunities. However, making that first critical push is clearly difficult (otherwise it would have been made already). Looking across the economic docket, there are many indicators (retail sales, durable goods, consumer confidence, CPI, etc) that can perhaps tap dollar volatility. But to reach underlying risk appetite, it may take the confluence of all the releases working together or perhaps something all-together more intense. At this point, we need to be less concerned about ‘how’ the move will happen and more focused on the ‘when.’ - JK

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