US Dollar update

Quotes:

FTSE 100 6003
Dow 12227
GBP/USD 16263
Gold 1412
US 2 Yr 0.68
US 10 Yr 3.43
Crude oil 96.87
US Dollar index 76.88



Middle east riots, Libya, Egypt, we saw gold carry from 1350 all the way back up to 1410, where it is now. But nobody bought the dollar? The traditional safe haven. In 2009, even a whisper of korea launching test missiles would have given the dolar a 1.5% one day rally..But why then, now, does nobody want the dollar..

Conventional arguements go along the lines of, the market fears US intervention in the middle east, which is likely to be bearish for the dollar (i.e. more money spending etc). Really? I don't believe that..

US Unemployment rate has come down to 9%, economic indicators have been performing reasonably well, Q1 corporate earnings outperformed (as they have been doing right through this bull market since March 2009). But, who, which trader, would be confident of buying the dollar, now, on the possibility that the market, will being to price in rate increases before QE2 is over (i.e. before the June schedule is complete). There may be some of course, but the value play would be closer to the time, and when there is a key change in the trend of the dollar (i.e. break a critical resistance level).

As I had mentioned in my previous blogs, I was waiting to see what the DYNAMIC would be. From March 2009-Nov 2009 (the core of the early stages of the rally) with the dow touching 10,000 the dollar had continued to be sold, as the Dow was bought.
As much, or more as any other analysis I could provide, on GDP, deficits, to me this was, and remains key. Let us make no mistake about it, even through the dollar bullish period from 95-97 (the Asian crisis, and funds flowing out of the overheated tiger economies into the outperforming US markets), and the Dow rallying with the dollar into 2002, to reach a decad ehigh of 120. Let us make no mistake about it, the US Dollar has been in a bear market for 30 years, coincidentally, along side the decline in inflation index levels, and the 30 yr bull market in US treasuries. So far this year, the dollar weakening has been supportive of the Dow, with the Dow currently at 12300, and the Dollar index at around 76.90. However there have also been occasions with economic indicators beating expectations causing the dollar to rally also. So there is a chance the dollar could rally with the dow in the future. However I dont think the correlation is likely to be strong as of yet.

Generally one could consider that as the fed funds rate has been in a "discrete" downward trend as one could say, thus the interest rate appeal of the Dollar has been decreasing along with this.



With Trichet, talking the talk, about meeting inflation targets in the eurozone (as there records would show), they even raised rates in early 2008! The market has begun to price in earlier rate increases in the eurozone, as well as in Britain (as I had mentioned in earlier posts, with CPI contuing to beat the 2% target, and registering at 4% for January 2011).

Now while it is true that the US dollar maintains its bullish trend, from My 2008, when the index reached a low of around 70, and proceeded to make higher lows, we are now at a critical point, on the trend line support, whereby a move lower, is likely to negate this bull market trend, and would be a clear indication, for an entry point to go short the dollar.

Aside from this, however, there is short term resistance on eur/usd at 1.40, and GBP/USD at 1.63, and upcoming debt refinancing in the eurozone which could cause a sudden burst in bearish Eurozone news, and be dollar positive.

However I would contend that since the Euro reached its lows of 1.19 in June 2010, with fears over Greece defaulting, since then with news of Ireland and so on, the market has become used to it, and the Euro held even 1.29 in Novemeber 2010. I would be looking at the possibility that these events will be opportunities to sell the dollar, at least before QE2 has come to an end in June. And then we will talk of the possiblities of the US Dollar bull market, and even then only enter positions, when it breaks above 80, and looks to challenge higher.

Trade recommendations:
As far as the Dow I am looking for a close above 12300 to signal its continuation to 12700. However with potential Eurozone news to come in March, and non farm pay rolls on friday, I would be looking to see how it plays out, before getting into the market.

1) Short Eur/USD, Long GBP/USD. I think that the potential for rate increases in the UK are higher, given CPI coming in at 4%, and likely to continue to beat expectations. Although voting member Sentance is soon to step down, I still think that the market will continue to perceive BOE rate rises being necessary (although personally I reckon they will do their best to hold on, and down play CPI as much as they can, maybe next month they'll attribute some of it to abnormally high oil prices).
Also form a technical perspective the risk reward ratio looks good, EUR/USD has resistance at 1.4, and also there is potentially bearish debt refinancing news to come in the coming weeks. GBP/USD a close above 1.63 would be indicative of a potential move to 1.67.

Buy GBP/USD if @ 16300 Stop 16100 Target 16700
Sell EUR/USD @ approx 13813 Stop 14050 Target 13450