The U.S. dollar was one of last week’s biggest losers during a very bullish week. As I have chronicled for several weeks now, the market’s bullish signals continue to grow. With bullishness on the rise and volatility on the decline (as measured through the VIX), reasons to stay long the dollar have apparently decreased.
After Europe’s big announcements on resolving eurozone sovereign debt problems, the dollar index dropped about 1.5% to crack its 200-day moving average (DMA) for the first time in almost 2 months. This drop resoundingly ended the relief rally that I anticipated after the S&P downgrade of U.S. debt and which finally began with a jump over the 200DMA in early September.
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The U.S. dollar index plunge below critical support at the 200DMA
The 200DMA continues to serve as a critical dividing line between a bullish and a bearish dollar. I did well with the dollar on the way up, but stumbled on the breakdown as I assumed the dollar would get a bounce before finally breaking. I am now transitioning to a fully bearish dollar position in anticipation of extended weakness.
Japan’s latest intervention to weaken the yen provides an opportune moment to close out my last dollar bullish positions. At the time of writing, the intervention is artificially driving the dollar up against all currencies presumably because the Japanese are selling yen against dollar purchases. From Bloomberg:
Japanese Finance Minister Jun Azumi said today the government took unilateral steps to weaken the yen, which strengthened even as stocks rallied globally this month on optimism that Europe will contain its debt crisis…
…The yen weakened 3.4 percent to 111.13 per euro after Azumi said he will act against speculation and plans to continue intervention until he is ‘satisfied.’ The currency climbed last week even as the Bank of Japan unveiled measures that Governor Masaaki Shirakawa said were intended to respond to the appreciation and fallout from the European debt crisis.
The timing of this intervention is eerily reminiscent of the intervention on September 14, 2010. Similar to this unilateral intervention, the 2010 intervention came right after the dollar index had just broken below the 200DMA. Japan’s efforts were erased quickly as the dollar’s surge against the yen lasted just one day and gradually faded over the coming weeks. Unfortunately for Japan, the Federal Reserve soon made the coming of QE2 (quantitative easing Part 2) official, and the dollar responded by selling off steadily and surely (see “Federal Reserve 1, Bank of Japan 0“).
This time around, either Azumi must be ordering a massive printing campaign, and/or he feels extremely confident that the Federal Reserve will not announce a QE3 or something similar at this week’s meeting. Regardless, this intervention seems just as likely to ultimately fail as the previous two did. Azumi’s use of the word “satisfied” is a key wildcard. In other words, are the Japanese finally prepared to intervene on BOTH a massive scale and sustained duration? Time will soon tell.
In the meantime, all the traders who continued buying yen despite constant warnings of an imminent intervention are now scrambling to get out of the way…and then prepare to find a new perch from which to start buying yen all over again. When I proposed back in early August a strategy for playing a yen intervention, I noted that traders tend to keep pushing on the currency to test the resolve of the intervention committee. I never imagined at the time that it would take THIS long for the Japanese to respond! The demand for yen seems nearly insatiable and awesome to behold.
My growing bearishness on the dollar makes me ever more bullish toward gold. This latest bout of currency intervention is a bonus reminder of the on-going competitive devaluations occurring across the globe that leave gold standing on high as a currency that cannot be created out of thin air and a currency much less vulnerable to manipulation for economic advantage.
Many gold bears assumed that yet another correction in gold meant (again) that the “bubble” in gold had finally come to an end. Gold held firm just above $1600 which I identified as the first opportunity for buying gold’s dip. Gold’s “bubble” now looks ready to “unpop.”
Gold holds firm above $1600 as the bubble begins to unpop...again
Gold is now straddling the 200DMA again. I suspect it will hang around these levels for some time before resuming its upward push. This assessment could change quickly if the Fed seeks to put a nail in the dollar’s coffin (and resume the secular decades-long downtrend).
In the meantime, I initiated another trading position in gold miner Goldcorp (GG). The stock is breaking out above the 50 and 200DMAs, but I will likely continue to hold until at least another challenge of 52-week highs around $56. GG has worked itself back into the previous trading range and continued consolidation could lead to a major breakout.
Goldcorp recoversSource: FreeStockCharts.com
While silver has recovered along with gold, it may have more trouble making further headway in the short-term. Silver is bumping up directly against double resistance at the 50 and 200DMA. It also has printed two lower lows and a lower high. I have moved into some Proshares Ultrashort Silver (ZSL) to hedge my holdings in iShares Silver Trust ETF (SLV) and Pan American Silver (PAAS).
Silver tries to recover
Finally, a dollar decline could deliver additional gains for the many commodity-related purchases I made as a part of the “commodity-crash playbook” during the market’s sell-off (including GG). I locked in some profits just in case the rally does not last much longer. I will write more about these moves in the near future.
Until then, be careful out there.
Additional disclosure: I am also net long the U.S. dollar and net short the Japanese yen.