Dollar Anomaly and the Fed Day

31 ביולי 2019

British pound reached a three-year low yesterday. The pound was sold out on growing fears of a potential ‘no deal’ Brexit. Investors perceive Johnson's words at face value. We do believe that nothing more than a snare which is based on an attempt to gain an advantage in the negotiation process. So, the markets are wrong, and the pound current price does not correspond to its REAL PRICE - it is very undervalued. Therefore, we continue to recommend its purchases across the entire spectrum of the foreign exchange market. Especially against the dollar.

As for the dollar, the situation has not changed much - it continues to show its strength although today the Fed might deal a severe blow to it. We have already noted that the markets estimate the likelihood of curring the interest rate at 100%. The current probability that the interest rate will be reduced 3 times by January 2020 is about 70% (!). And this is a serious signal for dollar sales, that is going to be a cycle of rate cuts, that is, a reverse in the Fed’s monetary policy. The vector change cost 15% loss of the dollar price.

Once again, we note that the foreign exchange market cutting the interest rate probably did not take into account. For example, the stock market has responded with new historical highs — a “classic” reaction for such situations. The bond market also took into account this. And the dollar in the foreign exchange market behaves abnormally. Anomalies do not often occur in the financial markets and this fact must be used. So today we sell a dollar.

In addition to buying the pound and selling the dollar, we will continue to sell the Russian ruble and oil, buy the Japanese yen.