Last week's news that China had devalued its currency by 3.0% whipped the markets around. I am speaking of the Forex market now. The dollar initially rallied, then declined. As of late last week it started to recover and we see more dollar strength today.
Matt Franko has been posting up some good info about price cuts (here and here) or further price deterioration in Europe. This was my take as well: that the Chinese move would put pressure on German and Japanese exporters and that would similarly put pressure on the euro and the yen.
It all makes sense except for one thing: that's the fact that U.S. Federal government spending is experiencing a slowdown in momentum. It's subtle, but it's happening and it has been happening since, depending on where you start measuring it, either early April or early May.
Overall spending is up year-over-year and that's good, but the slowdown in momentum suggests that we may see more surprises on the downside with respect to the economic data and that will cause Forex traders to sell.
My strategy right now is basically to "range trade," but I have a bias for selling rallies in the dollar.
