Look Out Above?

[Steven Vincent]

Today's action in the US Dollar was very interesting. It appears to have made a short term double bottom and a trend break is not far away. Bearish sentiment has reached an extreme with the market trading off of rumors and articles. Yet the USD Index is nowhere near its all time lows and has been selling off in a very gradual, nearly sideways pattern.

Today the Dollar was up strongly and the equities markets and crude oil also showed strength. One day does not make a trend, but from a contrarian perspective the one outlook that would encompass this configuration--growth--is almost as dismissed as the dollar itself.

This chart is worth mulling over:

My contrarian radar has been on alert for a few months now. Abortive attempts to get long the dollar have been made. But the time may soon come for the rare Dollar Bull.

If there is a rally in the USD, then what of gold and commodities?

[BullBearGirl]

Interesting post, Jimbo. Thank you. Treasury yields actually are going up a bit.

[Jimbo]

Saw a very interesting story about a fed governor 'telegraphing' that the fed may defend the dollar based on a breakout of gold. Can't remember the name of the guy, but he was on CNBC and said the fed had a goal of 4% inflation for the next 15 years, which would cut our debt (social security, etc) by 50% by devaluing the dollar by 50% over 15 years. Of course, this is nothing new. Today's dollar is worth a tiny fraction of its value from years past.
If true, we can expect: slightly rising yields on treasuries very soon, stabilizing the dollar. The fed gov said the thing that they wanted to avoid was gold going to $2000 like some folks predict it should. Instead, they want a very slow, steady rise in the value of gold/decrease in the value of the dollar (4% per year).
All of this is long term, of course. And what the fed wants is not always what they get.
To me, the key factor is the stock market. We are at key fib. retrace levels right now. If we break these to the upside, dollar weaker. If we turn down (as I expect) dollar stronger. Since the dollar is so close to a breakout up, this might correlate with a turn of the market to the downside... we will see in the next week or two...

[Steven Vincent]

When price bounces off the same level more than once it tends to indicate that buying support (or selling resistance) is present at that level. There's no guarantee that it will hold but together with other techinical signals may provide an edge in a trade.

[BullBearGirl]

Thanks for that pie chart. Could you please explain the meaning or implications of double bottoms and double tops? Does it mean there is a better or lesser chance of a breakthrough each time something bottoms or tops? Or does it mean something different altogether?

[Steven Vincent]

Well when you refer to "the dollar" you are most likely referencing the US Dollar Index.

Interesting. Apparently the USDX does not contain the AUD and NZD. Here's the pie chart:

Within the index the only countervailing force in addition to the CAD would be the JPY. Together they compose 22.7%. So the index would largely follow the performance of the European currencies.

[BullBearGirl]

Could such a bifurcation simply stop the dollar from falling and keep it in a range for a while? Or could the declining European currencies outweigh the rising commodity currencies and allow for the dollar to rise?

This is a very interesting and confusing time.

[Steven Vincent]

Also seeing that there is a bifurcation between the European currencies--EUR, CHF, SEK, GBP--and the Commodity currencies---CAD, AUD and NZD---with the latter breaking out and trending higher and the former lagging and showing signs of breaking down. This may be indicating strength in commodities based not so much on inflation but on demand resulting from strong economic growth. The European currencies may decline against the dollar as it becomes clear that the US is going to perform much better than Europe in the recovery. This may even materialize as soon as this week if the earnings and economic reports swing the tide in favor of the view that the "growth trade" is now on and the liquidity/inflation trade is receding. Look at GBP and SEK for possible short against the dollar trades.

[BullBearGirl]

Thanks for the great chart on the dollar. It is very interesting.

[BullBearGirl]

I'm still thinking the dollar may go up. On Thursday and Friday, there were huge surges in TBT, the double short 20 year Treasury ETF, which corresponded to a sharp increase in treasury yields, lower prices on the treasuries and an increase in the US dollar. I don't know if this was just an anomoly, if it was a precursor to future losses in treasuries much further down the road or if it signaled the beginning of the treasury bubble popping, but I'm going to keep a close eye on it. Of course, the Fed could buy more of its treasuries to keep the bubble from bursting, so there's no telling what will come of this. I'm laying low, staying in cash and keeping a close watch for a more definite trend.