In the coming weeks you will hear me discuss the current trade as a "credit event that equity will be forced to acknowledge." It is important to understand what will drive equity prices. The main stream media will make up "excuses" for price action but I believe as always they will be misguided.
The role the currencies will play in this trade is that of the mechanism that connects credit to equity. Many market participants ignore credit but when they see movement in the currencies they will be forced to change their perception. There is simply a shortage of the world's reserve currency combined with investors switching their focus from the return on capital to the return of capital.
The US dollar and US Treasuries will be the "safe haven" trade. This does not mean those two asset classes are sound and secure but in a world of fear and uncertainty the US still remains the place where capital will flow. Simply stated the supply of USD is falling as credit markets freeze up while the demand is rising.
Five Year Weekly Chart
Notice the bear flag that failed to play out in 2008 resulting in an epic move higher in a very short period of time. The same pattern is in play right now. Even the news flow is similar.
20 Day Intraday Chart
Notice the line that price has fought above and below. This decides which way the bear flag pattern plays out. After a pretty lengthy war which included an "air assault" from the central banks last week it looks like the USD is repeating the same pattern of 2008. Once again it appears this bear flag pattern will in fact break in a bullish fashion.
In other words if this is a war and the central banks unleashed a massive air campaign on the USD the fact that it took back a key level speaks volumes. The thirst is unquenchable.
Commitment Of Traders Report
The COT report confirms that probability favors the EUR moving lower and the USD higher based on current positions of non-commercial (large speculators) and previous correlations with such currency pairs.