In The Days And Weeks To Come, Here’s What I Expect From The Dollar

Dollar Rally
on Tap

Testimony from Alan Greenspan
last week made it perfectly clear that the path of US rates will continue to be
higher.  So while our view that the dollar will rally is based not only on rate
increases, signs of fiscal prudence and an overall solid level of economic
performance, the dollar has done nothing more that begin to build a bit of a
base after an unsuccessful attempt at a rally a few weeks ago.  So despite this,
we still see the dollar moving higher in the days and weeks to come.  With the
twin deficits still a concern for investors/traders, any sign of improvement
will likely be a catalyst for a sustained counter-trend rally in the dollar.

Historically speaking, the
dollar, if viewed in the context of past bear market corrections (July 2002, May
2003 & January 2004), should still have further to run.  What is interesting to
note currently is that the previous three corrections mentioned all occurred
during a period where rates were not rising as they are now.  Hence, our
viewpoint holds.

Despite this view, we would
still advise trading in and out of positions versus trying to weather the
erratic price action of late.  Currently we are relying heavily on 60 and
240-minute charts as a way to navigate. 

Technically speaking, the
dollar is sitting on some pretty solid support with the 50-day EMA and two
significant fib levels at 83.49 and 83.55 respectively.  The stochastics,
however, have pulled back a bit too far, casting doubt as to the longevity of
any bounce from here.  A move above 84.36 would be a good sign technically.

While we currently have a
short-term long position in AUD/USD, it should be noted that higher yielding
currencies like AUD & MXN have seen a large build-up of speculative positions as
noted by the most recent Commitment of Traders Report.  Additionally, despite
the RBA indicating that rates will likely rise in the coming months, the money
market has already priced in 50 BPs of hikes going forward.  A sustained move
higher in the dollar will likely flush out some ‘weak longs.’  This
scenario plays in nicely with our medium to long-term view point.  We will be
quick to lock in any gains if the dollar begins to move higher.

^next^

Looking
Ahead

Given our view of the dollar
near and medium-term, we are looking to position accordingly.  EUR/USD and EUR/GBP
will come under pressure on any decent move higher in the dollar as will USD/CAD
(move higher).  A recent survey by the Bank of Canada indicated that nearly 60%
of Canadian exporters were having difficulty coping with the strong Canadian
dollar, while 80% of the natural resource and manufacturing companies were being
negatively impacted. 

Technically, all three of these
confirm our macro view.

USD/CAD:  sitting on the 50-day
EMA at 1.2300, stochastic oversold and two key resistance levels on the verge of
being breached, 1.2345 and 1.2385

EUR/GBP:  unable to overcome
longer-term resistance at .6925 and .6900 now looming, 200-day EMA at .6874 and
no dollar rally are the only things preventing this from trading lower.

EUR/USD:  purely a play on the
dollar, although there are some technical merits too.  Lower highs and a lack of
follow through in recent sessions combined with directional indicators pointing
lower are the main areas we see technically.  A break of 1.3047 would be a
positive.

As always, feel free to send me
your comments and questions.


Dave