Prepare for a Rout in the Dollar

 |  Includes: CEW, FXA, GDXJ, GLD, UDN, UUP
by: Daily Trading

The USD appears to be in a lot more trouble than the average punter cares to believe. On a number of fronts it seems that many markets are on the verge of breaking through very significant resistance levels, but more on that later.

From a fundamental perspective I have been bearish on the USD ever since the end of 2008. This was essentially due to the willingness of the Fed to print money, initially to bail out failed institutions and later to fund US Federal expenditure programs and keep mortgage rates low.

It hasn't been easy keeping a bearish view on the USD over the last two years, particularly during the Greek debt crisis mid last year when the Euro was trading at about the 1.20 level and even nurses, school teachers, librarians, and carpenters were talking of the Eurozone being disbanded. Anyway we stuck to our guns and of course toward the end of last year Bernanke came up with "QE2," which was a thick layer of icing on the bearish USD chocolate cake. Yet there has been another development that may well prove to be a super sweetener. Home sales in the US have been plummeting. It is difficult to see Bernanke not extending "QE2" when it is supposedly due to expire in June. Let's not get carried away with speculation as now it appears the USD is pushing over the tipping point.

Note the behavior of the four charts below. Emerging market currencies are trading at a multi-week high against the USD (as per the ETF CEW). This is quite some feat in light of the Middle Eastern and Japanese Nuke crisis. Note the range compression that has occurred over the last two months! The longer a market moves in a sideways direction and the narrower the trading range the greater the intensity of the breakout. The chart of CEW alone suggests a material move to the upside should now be expected over the coming days.

(Click charts to expand)

Confirming the behavior of emerging market currencies is the Aussie Dollar, which appears to be on the verge of breaking to an all time high!

And of course from a precious metals perspective, gold either has or is about to break through resistance.

Echoing the behavior of gold is junior gold miners. I don't know how significant the "resistance" level is at 40 but above that level a multi-month high is signaled!

So with the behavior of currencies and USD sensitive markets confirming a bearish fundamental outlook for the USD, one should think seriously about the prospect of significant downside in the USD over the coming weeks.

Disclosure: I am long CEW, FXA.

Additional disclosure: Long LEAPS calls on FXE, FXA, & FXC