Memories Are Short, Trends Are Strong: Still Bullish on the Dollar

I have a myriad of rules and strategies I follow with my money. Each one of them has been put to the test over the past few months. Some of the signals that used to work have becomes run over by the freight train we call credit. Other signals, once considered unreliable, have become very accurate in predicting market direction. Like the model, the markets have been equally screwy with crude trading in line with stocks and the dollar trading with a negative correlation to the S&P. The long bond is being run higher in price (lower in yield) and very few understand why. And while this soup is cooking, the US government is buying AIG (AIG), Freddie Mac (FRE) and Fannie Mae (FNM). Irrational trade rules supreme - and this soup is far from plain tomato.

So as this far from plain market chops around, it makes it hard for anyone to find out what the overall direction of things is. For example, the dollar has screamed higher even as the US government takes on more and more risk from the financial markets. The Yen was the strongest global currency even with overnight rates around .30% and deflation setting in. The Euro, overly extended in the 1.50s, has corrected more aggressively than I could have ever imagined. And as the Bank of England attempts to stem the decline in the Uk Economy, it appears the market is saying that the decline will be much worse than many believe.

This makes the process of understanding the next direction of the currency markets extremely difficult. Sure, one could ride the trend in the dollar higher or continue to press their shorts in the Euro but each case, the index or currency is much extended. For the dollar, the move higher off the lows has been very powerful. It has run over the most experienced of traders. While some were bullish on the dollar (and not super surprised about the first 10 pts - me), the continued move of the greenback higher is beyond understanding based on the many fundamental factors sited in the opening. So while I may be confused by the move of the Greenback over the last 5% or so, that does not matter much. What is next is important.

The Verdict: Dollar Bullish

So in an environment where memories are short and the trends are strong, I will continue to remain with a dollar bullish bias. Longer term I have very serious reservations as the Federal Reserve is playing with fire on so many levels. However, given the continued problems in the world, my notably the failing economic situations in Europe and the UK, the greenback is finding buyers and I think this should continue through....tomorrow. No, actually, I believe the dollar index will continue to find buyers as long as the 85 level on the weekly chart holds. A move below that level and then things get interesting on the downside.

As for the implications here, a dollar bullish bias leads to a bearish bias versus the Euro and the British Pound. The Euro's trend still points lower but the long term cycle trend, positioned around 1.27 remains a support of sorts. In fact the strength in the Euro over the past week around this 1.27 level has been impressive and has stalled the advance of the dollar index each time the Euro has come down. It appears that even the ECB is finally gaining some credibility in actually noticing that the zone is in recession - even though that was not the case when they hiked rates back in June! Overall, I remain skeptical of the Euro to advance much overall. I continue to believe that we are targeted for the 1.21 level at some point.

As for the Pound, things are horrid economically in the UK. This has put the BoE on the offensive recently cutting 150bps (whereas the ECB only cut 50bps when they should have come in equally aggressive). Unemployment is rising and prices appear to be crashing lower. Year over year growth was around .5% which while not contracting, is not exactly earth shattering growth. Trading wise, the pound has represented risk of late so when conditions become "fearful" of sorts (that means lower stocks and a higher yen and dollar), the Pound has taken a harder hit than the Euro (as evidence of the rising Euro/GBP rate). Major support comes in around the 1.55 level that if not held, leads to a waterfall move below 1.50. This could coincide with a drop in the Euro through the eventual 1.27 level.

A few FX views in brief:

• The Yen has stalled its advance around 98 lately. I believe if par is taken out on a weekly close, this could set the broad currency markets to rally - versus both the Yen and the US Dollar. Till that happens, the bulls control.
• It appears the .70 level is become a roadblock for the Aussie to move higher versus the dollar. I had a friend yesterday try to compel me to become bullish on this currency. Till .70 is recaptured meaningfully and not followed by a 500 pt dive, I remain bearish. The RBA has been aggressive on the cutting side which may have put a floor on the Aussie around the 61 level (roughly where intervention occurred) but with the overall financial conditions in the marketplace elevated, the AUD remains risk to hold at this point. I would change my stance with a move over the .70 level, weekly close.
• After holding in for the most part as everyone else dived against the dollar, the Swiss is finally relenting and coming lower down towards the .85 level. Up til this year, when there was a crisis in the world, people ran into the Swiss franc. So does that mean that the risk in the marketplace is unwinding? Could be. Trading wise I remain bearish looking for the Swissie to move towards .85

Disclosure: No positions in currencies mentioned at the moment though that can change as I actively trade them.

Comments

[Socialism c...:]

Dollar bullish?? Good luck on that one! The Treasury and Fed are printing money and spending like no tomorrow. U.S. is the most highly leveraged nation in the world. We won't be the ones left standing -- especially with Obama the Marxist coming "Into His Own" soon. Dollar bearish, big-time!!!

2008 Nov 11 11:45 AM

[CLH:]

Good article. Yes the dollar will be king for a long time. Strong dollar means cheap energy and commodities. This is the only thing that is positive right now.

The goldies are out to lunch. They dont understand deflation.

2008 Nov 11 12:41 PM

[sickofthehype:]

Fill up your glass of koolaid and watch this Friday's G20 meeting in Washington.

Your bullish dollar is about to be yanked as the world's reserve currency.

And by the way - money supply is up 38% in a matter of months! Oh yeah, and $2 trillion being printed from thin air. Oh, and the stimulus packages that are now in place. Oh, and the NEW stimulus packages being worked on now, to be brought out prior to year end.

We're literally racing the world to devalue our currency!

And you deflation theorists - you're correct, FOR NOW, but this is a temporary period of SOME things deflating. Have you shopped for grocieries lately? Have you paid any energy bills lately? Deflation my ass. Good luck to you when inflation kicks in during 2009. You'll need it.

2008 Nov 11 06:07 PM

[Asbytec:]

I, too, am dollar bullish and have been for quite a while (index back in upper 70 territory) despite Fed liquidity injections. The dollar has lost over 30% of it's value over the last few years. It's due for a rebound. Here's why.

My understanding of the credit crisis leads me to believe our money supply is winding down, though I have not seen any figures (up 38%?) Credit is tight and Chinese exports are down. Less dollars are finding their way into the forex. Dollar based safe havens are all the rage, and hedge fund pay outs have a long way to go, yet.

I perceive a long and deep recession coming. Continued market volatility will provide some emphasis on dollar strength, as the author points out. And I see volatility well into 2Q, possibly beyond. The Fed rate is 1%, there is not much room for further cutting and still the markets have not shown many signs of strength.

The euro and the GBP have clear downward trends. The pound is currently in the $1.52 level, the euro at $1.25. Both have continually broken their support levels. Who would have thought that? And the Euro Zone is probably going to ease further as this recession begins to really hit hard next year...maybe through all next year.

The dollar index is again over 87, as of this writing. I read somewhere if it broke resistance at 86, then the trend will become firmly bullish. That has happened.

Lastly, Obama is probably going to advocate a strong dollar policy.
www.guardian.co.uk/bus...

So, I can think of many reasons to be bullish on the dollar, and fewer reasons not to. Though, the dollar will peak sometime. When? Why? And what signs will tell us? Those are the questions. I suspect not for a long while.

2008 Nov 12 09:03 AM

[verites:]

Dollar is rising purely due to the temporary phenomenon of flight to safety and absence of an alternative currency. You would need all the luck possible to bet against the looming economic and fundamental reality.

If you are a short term trader, you might win for some time. But common sense and economics point to a impending severe decline in dollar. Question is what will it decline against? Euro, GBP, yen, Swiss franc? I don't know, but decline, it will. Any asset or commodity that has corrected beyond its fair value e.g. crude may be a good choice.

2008 Nov 18 09:50 AM