This tool can help you forecast the US Dollar
Sometimes currency
trading is exhilarating. Other times it is like watching paint dry.
And in some circumstances it is like trying to track a storm. In the last update
we made about the dollar on September 5 we reiterated our long held view that,
“Our expected strong rally in USD from January to June would be followed by a
renewed slide from September to December.” We also told clients that the “easy”
money would be made in the first run, while the second half correction in USD
would be daunting.
So far this year, the biggest surprise has been
the unbridled passion for gold amongst speculators while they shun similar low
yielding safe haven currencies such as the Swiss franc. Below we show a
synthetic Commitment of Traders report of the Gold/CHF trade.
Since gold embarked on its bull run over three
years ago, the best times to be out of the yellow metal have been when both the
synthetic Gold/CHF Commitment of Trader report was above 50,000 net long and
when the RSI for the underlying contract had moved above 70 then back below.
As you can see from our chart above, now is just
such a time to be cautious on gold. But if you are bearish on the dollar as we
are for the seasonal downtrend from Sept-Oct, then the better bet is to be short
USD/CHF. Note that CHF has become the new funding currency for the “carry trade”
and with USD yielding 3.5% and soon to yield 3.75%, we remain intermediate term
bullish on USD/CHF over the next year as traders come in to buy the dips and
collect the leveraged carry.
For our near term bearish outlook on USD/CHF to
hold we need to see the 50-day moving average reverse the current trend and head
back down to 1.23 and 85 in USDX.
As we said in our last update, “The US dollar
will likely undergo a 3-4 month correction of its recent gains but will rally
again in 2006 because of the large interest rate differential in its favor.
Recall that we predicted a dollar rally from January to August to then reverse
course in September as the market realized the Fed would pause in its interest
rate cycle at 3.5%. This in turn would cause an unwinding of long dollar
positions, which would set up the next significant rally for January to August
of 2006.”
The Fed looks intent on raising again this month
but it doesn’t have much room to keep on a “measured pace” without inverting the
yield curve. So if we do see a pullback in USDX to 85.00 in the coming weeks
this will signal a good buying opportunity. If you disagree and think that gold
is breaking out then we suggest considering to go short USD/CHF or long EUR/USD
instead.
Regards,
Jes Black
FX Money Trends
613 4th St Suite 505
Hoboken, NJ 07030
Tel: 646.229.5401
Jes
Black is the fund manager at Black Flag Capital Partners and Chairman of
the firm’s Investment Committee, which oversees research, investment and
trading strategies. You can find out more about Jes at
BlackFlagForex.com.
Prior
to organizing the hedge fund he was hired by MG Financial Group to help
run their flagship news and analysis department,
Forexnews.com. After four
years as a senior currency strategist he went on to found
FxMoneyTrends.com – a research firm catering to professional traders.
Jes
Black’s opinions are often featured in the Wall Street Journal, Barrons,
Financial Times and Reuters. He has also written numerous strategy pieces
for Futures magazine and regularly attends industry conferences to speak
about the currency markets.