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So this dollar bull is starting to capitulate. I have argued every possible bullish case for the Greenback and for the most part been proved wrong. Now just imagine if I had shorted everything against such calls and bought the dollar!

Anyhow, I am seriously wondering if my logic on the dollar is flawed. I thought we had a growth story here with the greenback but nobody is taking seriously the moves in the equity markets here in the US. Instead, they're focusing on these flawed economic numbers. Granted, the trade balance is still an issue (and a rising amount of GDP weakens) and the fact that the most recent TIC data showed net sales of US Treasuries did not help either. However Fed policy is neutral and not dovish – that is, it supports the dollar.

However, the bullish case is not making any headway whatsoever. Perhaps traders are getting carried away. Perhaps central banks are diversifying further. Perhaps traders like me are deciding that the dollar rally is not meant to be. All of these argue for me to take a step back and look at the current condition of the majors before jumping on the bear train. And to start, I need to look at the Euro (since it makes up roughly 53% of the dollar index).

Euro Currency Topping or Breaking out?

The trade on the Euro lately has been very methodically supported to the upside. The finance ministers in Europe have not really been arguing against the appreciating Euro as much as one might think (though at 1.29, it is still a far cry from the 1.36 levels of last year). As a result, the hawk rhetoric from the ECB, along with weak economic numbers in the US, has given the Euro bulls a reason to buy and buy they have! The Euro touched the 1.2950 leve Wednesday morning l which is major resistance and if it had climbed above the 1.2970 level and closed that level by the end of November, a breakout would be confirmed and 1.35 would be the next stop (leading to a 2.5pt breakdown in the Dollar index in the process back to the previous lows).

However, the Euro failed the number earlier and is now backing off. Some might say that we have now had the test of the upper part of the range and the next move is back to the bottom of the range. That is what makes the next week very important for the outlook in the dollar. If the Euro breaks higher, it will join the gold market which has the upper hand versus the dollar at the moment. The only one variable that would that has not joined this trifecta against the dollar is the trend of the 13 week bill which is currently flat around 4.92%. If it gives out, then I will have a full fledged sell signal on the dollar. Needless to say, I will be watching things closely.

The Key is Within My Models
At the moment, I am long the Euro, GBP, Euro/GBP and short the dollar index. You can see then that I am playing for a breakout of the Euro as I am basically net short the dollar from my models. However, I am now working sell stops in the market for the Euro and Pound. This is where the picture develops. If the Euro gets above the 1.2970 area, I am pretty sure that my sell stops will not be hit. If my sell stops get hit, the top of the range will be in and the Euro will be heading lower (and the dollar index is moving higher). Since the Pound and Euro are both trading with R%’s in the 90’s, I think my stops may be taken out and thus, this supports my bullish stance on the USD.

Exploding Yen?
I trade the Yen based on the DM buying or selling pressure on the monthly chart (along with some other indicators). Basically if the trend is down in the DM indicator, I only sell the Yen and if the trend is up, I only buy the Yen. At the moment, I still have an outstanding sell signal on the Yen but things have perked up today and over the past month. I argued sometime ago that the Yen should trade to the top of this grand trading range but it never made it to 102.50 pushing back toward the 1.20 level several times. As it rallies to 114 today, the DM selling pressure is now unwinding. However, the buying pressure still remains in the dumps. So what is one to do? Get neutral on the name and trade the currency both long and short.

Yen index

In addition to this movement, check out the chart of the US 10 year note [TNX] and the Yen. They are almost identical over the last 8 months. When the Yen has rallied, the 10 year has sold off in price (and rose in yield). If the Yen is moving to neutral in my models and the 10 year bounces higher in yield from the current levels, does this mean the yen explodes higher vs. the dollar (and lower in yen/dollar)? Could the 102.50 level be the target? I am going to do some more research into this.

I have trouble accepting this assessment because the JPY government lowered their assessment of the economy on Tuesday night. Further, the Bank of Japan [BoJ] and the Ministry of Finance [MoF] have been bickering so much over BoJ policy that perhaps this gets in the way to some extent in regards to rate decision which further weakens the JPY economy and takes the BoJ out of the equation leading to sales of the Yen. Very tough call overall.

Source: Dollar Troubles