During the financial crisis, the US dollar rallied strongly as people ran from risk and sought safety. When the equity markets bottomed in March, the dollar reached its peak. As the stock market rallied, the dollar carved out a traditional head-and-shoulders reversal and has moved lower since. In fact, with the current decline, the dollar has now reached the initial downside target (blue box) that I identified in the May 25 newsletter.
Click to EnlargeTo benefit from a declining dollar, I took two different positions in my weekly newsletter EPIC Insights. The first was a currency ETF that benefits directly from dollar weakness—the Brazilian Real Fund (BZF). As the dollar falls in relation to other currencies, BZF rises. The other has a more indirect connection—the Powershares DB Commodity Index Fund (DBC).
Since most commodities are priced in dollars, a declining dollar leads to higher commodity prices. A change in the rate of the dollar alone does not change the level of underlying demand. Instead, since the demand of foreign purchases of commodities is the same and these foreign currencies have gone up in value versus the dollar, a falling dollar will drive commodities higher in order to make the net expense the same.
Given the decline in the dollar, our investments in BZF and DBC are higher by 27% and 7%, respectively. With these profits accounted for, my attention is fixated on where the dollar goes from here. My guess is higher.
The US Dollar Now
Based on market sentiment and trade activity, it appears that nearly everyone is short the dollar. While I remain concerned over rising deficits and a left-leaning government, I think the trend has moved too far. Charts of BZF (view chart) and the British pound (view chart) tell a familiar story of foreign currencies running up long trends that are on the cusp of being broken. Combine the pending trend breakdown with the dollar having traded to the reversal price target and we are seeing the setup of dollar strength.
The dollar may eventually drift somewhat lower, but the next dramatic move will be to the upside. Having correctly called and profited from the decline, I will not stand idle and watch gains morph into losses. Instead, I will act as I often do and move to the sidelines while awaiting the next opportunity. I recommend selling the positions in BZF and DBC as this week’s fundamental trade.
Today's Tech Ticker Calls a Bottom
Blain here. Today's Tech Ticker had a great clip discussing the US Dollar and why it has bottomed. There are three main reasons why guest Robert Prechter, president of Elliott Wave International, feels the US Dollar is going to be bullish for the next year or two:
- The Elliott Wave Pattern: Five waves up followed by five waves down means the next direction is up (details explained in the below video).
- Sentiment has reached an extreme: On August 5th Prechter wrote that the Dollar Sentiment Index reported just 3% of traders were bullish. Extreme sentiment usually means a bottom is very close.
- The big risk right now is deflation and not inflation: Prechter thinks the bursting of the latest bubble will lead to a major economic depression.
A rallying dollar would support Sean's article yesterday citing how the current market rally may be nearing its end.
Video below (Note: All RSS readers and Email readers you will need to view this post on our site to watch the video):
Source:
Dollar Hits a "Major Bottom," Prechter Says: Why That's Not Such Good News
Peter Gorenstein
Yahoo Finance Tech Ticker, Aug 11, 2009 07:44am EDT
Hi Sean,
I found your blog on the marketclub traders blog. This is an excellent blog, and I want to commend your hard work.
That said, I think telling people taht it's ok to be bullish on the USD at this point in time is a bit premature, and possibly reckless.
Fundamentally speaking, it is impossible to run into deflation with the FED printing money at a record pace Further, the US is service based economy, we don't manufacture much of anything tangible anymore. Add the mountains of debt Obama is piling upon the budget, the deficit in every state and local budget, and the record amounts of treasury bills being sold, and there isn't a way to forecast a scenario where the fed can stop printing money.
Technically speaking, the chart of USD is still bearish. and util it breaches 90, or some indicator and chart pattern says otherwise, why would you go long?