Tug Of War Continues

tug-of-war between the positive cyclical forces
and negative
structural backdrop for the U.S. dollar continues. We believe that cyclical
forces, such as stronger growth in the U.S. and Federal Reserve tightening, will
push the dollar higher in the intermediate term, but as mentioned last week, the
technical pattern emerging is complex and will likely continue to challenge and
frustrate dollar bears and bulls alike.


Medium-term players are still holding short positions in the U.S. dollar, which
will accelerate the move higher in the currency when these trades are
liquidated. While sentiment towards the dollar has turned up in recent weeks, it
has not reached the same level seen in previous corrections, which supports our
view that medium-term traders have not yet capitulated

recent technical break-down in the CRB Index after nearly taking out highs not
seen since 1979 spells trouble for commodity based currencies like AUD, CAD and
NZD.  Industrial production in Japan is decelerating, which is usually bearish
for commodity prices.  China’s leading economic indicator has also not shown any
signs of rebounding, which could depress commodity prices in the intermediate

oil prices should be a negative for CAD.  The correlation (negative) between USD/CAD
and the CRB Energy Index is quite striking, and should allow for a solid long
USD/CAD position for longer-term oriented traders if the CRB Index remains under


Speculative positions in oil are also very high. A more pronounced setback to
the price of oil that feeds into Canada’s energy-loaded equity market is
negative for the Canadian dollar.

Despite Norway being a large exporter
of oil, the NOK is not well correlated with moves in oil.  In previous pieces we
have noted this is most likely due to the fact that most Norwegian oil revenues
are held “off-shore”.

Despite our bullish dollar
view, we are sensing that a breach of the key 85.30 level may need to wait a bit

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