The inherent weakness of the US dollar was highlighted once again in Tuesday trade when global risk and precious metal markets pulled back to support, while at the same time a move into the historical safety of the US dollar and Treasury markets was ignored. The story of 2011 has been to buy the dips on any reversals in equity, oil, gold, and silver markets, while at the same time the dollar index has been sold on any upward tests of resistance.
A signal to get long S&P 500 futures at 1335 was sent to clients, that targets 1337 and 1339. There is also a long WTI oil signal forming that will be confirmed if 112.50 is broken in US session trade on Tuesday. Both silver and gold bullion trade are consolidating recent reversals, both of which were highlighted as very likely in Monday’s video review and client notes. Now is the time to exercise patience in regard to precious metal trade, and wait for 1-hour chart confirmation that the market is willing to hold 46.00 and 1500 respective support.
The fact that the dollar index is managing to hold around 74.00 support when precious metal and S&P equity trade are sitting at yearly highs, reveals how hard the central banking battle has been to protect the ravages of global reserve valuations from the manipulation of the dollar by the Federal Reserve. The equivalent dollar index all-time low is still 4% away, and is likely to be the most important 4% that any global asset class has moved in recent history.
There is undoubtedly a move towards a new global reserve, that although may still include the US dollar to the greater degree, would also include further exposure to the euro, precious metals, and oil. The halcyon days of a U.S. Treasury market that is revered and respected are gone; reality will now play catch-up with the impact of loose monetary policy and quantitative easing programs on the US dollar. Economic books and thesis can now be re-written without the 10-year Treasury note dominating proceedings. A new dawn is rising on the global traded market.
With the US administration being called out this week on its public long-dollar policy by Jean-Claude Trichet, the head of the European Central Bank, it has become clear that the global banking community is no longer willing to accept the heads of the U.S. Treasury and the US Federal Reserve at their word. It would seem that respect for the US administration is waning, in-line with the reverence once held for the US dollar.
The double-edged sword in the current central banking and reserve asset ratio scenario is that the holders of US debt and US dollar-based reserves will require that the greenback maintains its value whilst the transition into a basket of reserve assets is completed. As the long and drawn-out process is completed it is very likely that traders will see an increase in central bank-based headlines, and sound-bite news releases, that promote and encourage a strong dollar policy.
How the US administration will cope with a stronger dollar is hard to fathom at a time when current account and trade balance deficits are manageable only because of the dollar index hovering just above all-time lows. A technical break below 73.75 on a weekly chart basis would seem to indicate that a high powered move to test 72.50 would be inevitable on DXY. The last time that the dollar index traded at those levels, in the early part of 2008, the S&P 500 index was trading around 1440.
Having gained only 1% in value over the last decade of trade, and in the midst of question marks on quantitative easing programs being completed or extended, the S&P 500 has room to move higher. If the current economic outlook is maintained, and if as the US administration can act with impunity regarding US dollar valuations, there is no reason to believe that the dollar index will do anything other than get sold at resistance at the same time the precious metal and equity markets are being bought at support.
Signals and daily market update alerts will be sent directly to clients as the story of the US dollar unfolds during 2011, and will include full detail of equity, commodity, precious metal, and currency valuations. Trade plans on each asset class are available at 17:00 ET on each sector. New generation markets are being formed, and as that process is completed it is reassuring to be able to draw on the experiences that cover three decades of black Swan events, which could pale into insignificance in regard to what is now unfolding.
Full technical reviews will be posted into TheLFB daily Global Video Charting, which is made available to clients via the website, and in the links posted into the daily newsletters. Subscription detail is available at TheLFB-Forex.com
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