Falling Dollar, Rising Market

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 |  Includes: CNY, UDN, UUP
by: John Dalt
The end of the month looms and we wonder, what happens next? The market has risen almost 9% in September, one of the best one-month gains in years. Before you start high-fiving your wife tonight, you may be interested to know the UUP ETF lost 9.5% in the last month.

U.S. Dollar IndexClick to enlarge

The USD dollar index started the month just over 83 and is closing the month at 79 for a 5% loss. Wow, at this rate it would take two years in a ten-year Treasury to make back ONE MONTH OF LOSS in purchasing power.

If we want to look behind the curtain of the last month's rally, look at the value of the dollar. Look at the 50-day and 200-day moving averages in the chart above. The 50-day moving average is ready to cross below the 200-day average. Regular subscribers will recognize this as the “Death Cross.” Technical analysts interpret this as a precursor for more weakness.
Don’t be fooled that people in Washington are upset about this. They are not. The Fed is doing their best to encourage it. This is what Quantitative Easing does, print more money and make the existing money worth less.
The U.S. House of Representatives approved a bill yesterday to declare China’s Yuan exchange rate a “trade subsidy.” I don’t doubt that it is, but be careful what you wish for. You might get it. The Chinese have tied the Yuan to the dollar since the credit crisis began in the summer of 2008. This has actually provided stability to currencies world-wide.
On June 19 the Chinese allowed the Yuan to adjust daily. This followed the U.S. Congress pressuring the Treasury Department to declare China a currency manipulator last spring. The Yuan has gained approximately 2% in the last three months against the dollar.
The dollar has fallen over 11% against a basket of other currencies since early June. The Yuan has fallen against the same currencies.
This means other countries are disadvantaged against the dollar and the yuan. Last week, Japan intervened in currency markets for the first time in six years. They sold Yen, as it was reaching levels that made their exports too expensive in other currencies.
What would happen if the Chinese let the Yuan move higher? It would disadvantage their exporters with U.S. bound goods. They could let it appreciate five or ten percent against the dollar, and be in the same place they were in June with the rest of the world!
The Chinese may be ready to grant our wish, and we should hope they don’t. Could it be the only support the dollar has is the Chinese Yuan? If the Chinese say goodbye, sayonara, hasta la vista, what happens to the buck? It plummets.
Bloomberg reported earlier in the week that Yu Yongding, a former advisor to China’s Central Bank, observed that “I think we are one step nearer to a U.S. dollar crisis. Such a huge amount of debt is terrible. The situation will be worsening day by day.”

We think the September rally is a giant head fake. It is kind of like a straight level section of track on a roller coaster: designed to suck in overconfident retail investors, and then vacuum the money out their accounts.

The gathering storm over currency exchange rates give us pause. We see a future with a lot of volatility, and wild swings in both directions as traders and investors try to understand the ramifications of the changing landscape. Hold on, next month will not be a repeat of September!

Disclosure: No positions