10/01/10 US Dollar Index Targets New Lows

Continuous US Dollar Index Weekly 12/28/07-09/30/10:

The US Dollar Index broke down and lost 5.8% during the month of September as it failed to hold above 80.00. In the previous market update, I noted the dollar index being at a "critical level" as it was testing a neckline from it's head and shoulders formation, "...breaking this neckline here will suggest the market may believe QE2 will happen and if confirmed this could lead the dollar index further depreciating and targeting down to 71.00." Looking at the above chart, the dollar index broke below this level, and has made lows down to 78.620. Is the market anticipating QE2? Possibly, but nothing is confirmed and all we see is the price action in the market. Technically, a head and shoulders is in the charts, 89.10 head, 80.00 neckline, giving a range of 9.10. The market has broken below its neckline giving a potential target of 70.90 (80.00-9.10=70.90). This would lead the dollar to test it's lows from 2008 of 71.05. Short term, the US dollar may be oversold, any retraces back to 80.00 should resist and be seen as an opportunity to sell. If the market can find itself getting back above 80.00, the right shoulder area of 80-83 would need to be worked through for any attempt to move higher and retest the highs of 89.00. The Euro has moved higher against the dollar in hopes that Europe may be removing their stimulus policies before the US and Britain. The Euro futures gained 7.7% in September.

RISK DISCLOSURE: PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT. OPINIONS EXPRESSED. INFORMATION COMPILED FROM SOURCES BELIEVED TO BE RELIABLE, ACCURACY CANNOT BE GUARANTEED.

Thank you and best of luck trading!

Stewart Solaka

futuresMONSTER

Twitter: @CHICAGOSTOCK

EMAIL: CHICAGOSTOCK

Sunday Morning Cartoons: Duck Tales on Inflation

More on that here.

Saturday Rock Blog: For Whom the Bell Tolls (Fannie & Freddie Bailout)

Links:

Gov't May Soon Take Over Fannie, Freddie - Washington Times
Gov't Takes Control - Reuters
Washington's Fannie & Freddie Plan: Why Now? - Forbes
Game Plan: Time for a Rate Cut? - Cramer
Fannie Mae, Freddie Mac Are Taken Over by U.S. Treasury to Avoid Collapse - Bloomberg
S&P slashes Fannie, Freddie preferred stock to junk -Reuters
The Details & Comments - Calculated Risk

My take on why this is happening now and not months ago, the strength in the dollar makes it possible. This action will no doubt end the rally in the dollar and we'll just have to see how commodities react to this news next week. While the feds talk a strong dollar they secretly love a weak one because it makes American goods and services more competitive. So this inflationary action (a bailout) is likely to put pressure on the dollar. Take a look at the US Dollar index, talk about a bear market rally, wow:

That recurring theme

In my case, that would be the US Dollar versus the Euro and all that lively action. It's a traders dream. I have said regularly that "there is a distinct danger of intervention at these levels". Fridays intra-day move probably wasn't intervention, but we must be aware of the possibility and such a move is likely to come in early European trading hours when and if it comes.

As things currently stand, you can only think that there are some awfully flighty traders out there. I personally bought a couple of puts when I saw the hover. The Euro moved from 1.595 to the dollar, to 1.571 in the space of an hour in what Pythagoruz likes to call "a fast move from a failed move". The Euro was hovering at record levels but failed to push past the round numbered psychological barrier of 1.60 to the US Dollar.

In my opinion, without intervention, that barrier will tumble. It's just a matter of time and our favorite chart, the FXE 2 year weekly, with PSAR may be pointing out when that move will come. Let's take a look, and you can click on the chart for a larger image.



The PSAR, or Parabolic Stop and Reverse on this chart has been the most consistent indicator I have seen in a long time. When that meets the stock from the bottom side, you have a buy signal on your hands that hasn't failed in over two years. That isn't what the PSAR was originally intended for, but it's working here.

Based on this chart, I believe we'll trade around this range until the PSAR catches up to FXE. Barring any intervention by the central banks and the ECB in particular, that should be the start of the next leg up, beyond 1.60 US Dollars to the Euro. I'll be waiting for it.

Disclosure: I have no speculative foreign exchange position, at this time.

Slippery Currencies

So how can we play this USD move?

The fact that the US dollar is under pressure is indisputable. On Aug 15 I moved a large portion of our family liquidity out of the US dollar, into the Euro. Since then the euro has moved from 1.346 to the dollar to almost over 1.42 today, and I expect this trend to continue.

In my opinion, the US Federal Reserve isn't going to have much choice with interest rates in the near future. Rates are going to have to come down to protect the US economy from the fallout of this sub-prime lending debacle. But at the same time the European Central Bank is facing an inflation problem here, and rates will have to be raised. It's only a matter of time.

Long term debt investors looking to increase returns will be buying Euros in order to invest in the European debt markets, and the volumes involved are more than enough to affect the Euro:USD exchange rate. As I write this, clever European exporters are hedging their USD accounts receivable and future sales against this likelihood. One way to do this is with CurrencyShare funds such as FXE. There is a similar fund for the Canadian dollar too, FXC.

As a retail trader who is not adverse to risk, it is my opinion that the options chains on these funds is the best risk/reward trade to be made today. As an example the FXE Dec 145 call are quoted at $1.05/$1.50. This, at a time when FXE itself has moved from $134 to $142 in just 5 weeks. There are 11 weeks ahead of us, before the December options expiry.

If you are concerned about the volume of trading in FXE options, you might be better trading the FXC options chain. Canada is Americas largest trading partner, so hedging and trading of the currencies far exceeds that of any other currencies. This means that spreads are narrower, liquidity is better, and trading should easier if the market goes against you.

Disclaimer: I have no positions in these products, at this time. But that could change today.

A new link in the Blog Roll

I'm adding a new link to the Blog Roll, in the sidebar. Minyanville.com gets my thumbs up for informed and balanced financial commentary.

As I live overseas and changes in the dollar exchange rates are particularly important to me, I greatly appreciate the sort of commentary from the likes of Todd Harrison. I've been reading his articles for a while now, and only just looked up his biography. He actually started Minyanville and he's an ex-TSCM type. Go figure.

As for his take on the dollar? This article explains it all. The title "Cracks in the Dollar", dated Sept. 13. Oh boy.