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Will Lower Equities Rally the Dollar?

|Includes: CurrencyShares British Pound Sterling Trust ETF (FXB), FXC, FXE, FXF, FXY, UDN

It seems that the equities market is more responsive to negative news now.  The early market was mixed to maybe a little better after digesting a bunch of early morning reports including the final GDP report that came in a little better than expected, and the non farm payroll report.  There is increasing concern that the impact of the government stimulus is wearing thin, and the private sector is not recovering enough to pick up the slack.  The Chicago Purchasing Managers Report came in at 46.1 worse than the expected 52, and confirming the suspicions of the bears.  On a day when end of the quarter window dressing was expected,the Dow was knocked down over 100.  There have been big quarterly gains pushing the S & P earnings ratio is the highest since 2004. The market is vulnerable and news that fails to confirm the recovery is very bearish.

The Euro was trying to recovery against the USD after the 300 drop from the yearly high when the negative report was released prompting a 98 pip sell off.  As we enter October, a period noted for increased volatility often with a downward bias, how will this affect the dollar?  This year's equity rally is given for the reason the dollar lost so much to the other currencies.  Will  a market contraction now rally the dollar, or are the large twin deficits too much to overcome?

The two channel trend lines in the chart look very tidy and symmetrical but support and resistance lines are made to be broken.  We bought the pair yesterday at 1.4535.  Our vote is for a rally in the euro that will carry into the 1.47/4750 area.