Dollar Showing Signs of Reversal
The US Dollar, everyone’s candidate for a total collapse, may in fact be showing signs of a reversal.
I admit that I can not think of any good reason, well maybe one scary one which I’ll get to in a moment, for the Dollar to strengthen. Yet when you look at the charts of the Dollar against the majors you see that indeed the Dollar has shown a surprising amount of strength, except against the Japanese Yen.
The most notable turnaround has been against the British Pound. The UK retail sales figure for December announced yesterday, knocked the stuffing out of the Pound taking it very quickly 200 pips lower. A quick look at the daily chart will show you that the Pound peaked at 211.62 on Nov. 11,2007 and closed yesterday, Jan. 18, 2008 at 195.55. The weekly charts have all turned down and it looks like there is a lot of room to the downside. 188.92 is the current 40 week moving average.
The euro peaked at 149.68 on Nov 23, 2007 and closed yesterday at 146.21. A look at the daily chart seems to indicate that the Euro has put in a nice double top with the second peak reached on Jan 15 at 149.22. While the reversal in the Euro is not as clear cut as that in British Pounds it certainly looks like we have seen the highs in Euro for some time.
The real test for the Dollar will come about the time of the next Federal Reserve meeting set for Jan. 28 and 29. The market has already factored in a 50 basis point cut in the Fed Funds rate. Since getting what you expect to get seldom has much of a favorable impact on the forex market even if a 50 basis point rate cut is announced the market Euro and Pound may continue in a downtrend.
A big red flag for further across the board Dollar weakness from here is that just about every news letter service under the sun is warning of a total Dollar collapse. The forex market seldom does what everyone thinks that it must do. At least not for long. No, something else may be at play here that accounts for the surprising Dollar strength against the Euro and Pound and perhaps a quick reversal from multi years lows against the Swiss Franc.
That brings me to the scary part. The condition of the US financial system may be deteriorating so drastically that it will soon be difficult to borrow money at any price. We may experience a panic spike of interest rates in the US to reflect complete chaos in financial markets.
That may bring, and I stress may, a deterioration in financial conditions that the forex markets are beginning to sense that would tie in with a stronger Dollar. The inflation rate is also picking up substantially and a stronger Dollar would tie in with that.
For the past few days the Euro seems to be tracking the movement in the US equities markets very closely. That is a falling stock market has highly correlated with a falling Euro. The opposite is still true with the Yen. As the Dollar/Yen trade is still the carry trade of choice a falling stock market usually means that the Yen will strengthen as carry trades are unwound.
There is a lot to keep your eye on as 2008 gets under way with a bang. The most important thing is to carefully watch the charts. Don’t think that you know a lot about what the Dollar should be doing. You will be far better off as a forex trader by trading with current information about what the Dollar actually is doing. You had best study those charts before making a trading decision.
If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!
