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Big Dollar Rally Coming?

July 16, 2010

I am bullish- yes bullish-  intermediate term on the US dollar for several reasons:

1) It is in a long-term technical up trend (in a 100-day channel buy signal)

2) The dollar  has pulled back violently from its highs–much like it did in 2008 in a similar situation before rebounding. Likely the short-covering in the euro has helped exacerbate this situation. Since the euro is in very deep trouble, and in a steep downtrend I see this euro rally/dollar decline as a temporary respite.

3) The dollar has a negative correlation with the stock market because it is a carry trade/risk trade where speculators borrow in dollars to risk capital in other assets. Currently the spring/summer correction in the stock market found a temporary bottom and margin calls to speculators to re-patriate dollars are falling. Since the market is highly stretched to the upside in the short-term and is in a long-term downtrend with mixed probabilities in the intermediate term, the dollar has plenty of scenarios where it could stage a rally.

4) Flight to Safety:  Current deflationary threats due to the employment and poor credit conditions favor bonds. The primary goldbug thesis for the dollar going down was the risk of inflation/debasement via excessive money creation.  Bonds are technically bullish which confirms a perceived deflationary threat (see AGG for a pretty chart). Buyers of bonds internationally drive demand for dollars. Gold in contrast looks weak in the short-term at new highs and may not be as appealing to hedge fund managers since they likely buy into the goldbug thesis concerning the dollar. Gold is over-owned within the hedge fund community and could spontaneously correct several hundred dollars on a liquidation. Gold is often inversely correlated with the dollar, but is currently sitting near a peak in positive correlation (correlations are often mean-reverting in the intermediate term). An unwind of major gold positions could spark a rally in the dollar.

5) The dollar has become a mean-reverting instrument with long-term trend characteristics. This favors the current condition of being deeply oversold in an up-trend.

6) Downside risk at this level is low as we are nearing levels of support and a successful trade will probably work within 5-10 days.

8 Comments leave one →
  1. Josh permalink
    July 16, 2010 2:33 am

    The dollar is in a long term uptrend? How long term? When I look at a chart of the dollar I see a long term downtrend with a possible bottoming process happening now. What timeframe are you looking at?

    Btw, this post is very uncharacteristically (so far) discretionary of you.


    • david varadi permalink*
      July 16, 2010 2:43 am

      hi josh, the uptrend that i consider longer term is based on both the golden cross (50sma>200sma) and the 100-day donchian channel which helps to identify relative support/resistance. both perform well in testing for this purpose. I know, I know……discretionary isn’t what ppl are used to hearing from me -nor do they want to hear it coming from me. but hey its my blog, and sometimes I just can’t help myself when I feel strongly about something— plus its nice to shake things up a bit. system development can become stale and inaccurate if you cannot open your eyes to the more subtle intermarket/fundamental factors that affect price and risk/reward potential.

      • Josh permalink
        July 16, 2010 2:49 am

        Oh I wasn’t complaining about the post subject matter.

        Yeah, by that definition the dollar is in an uptrend. Perhaps I need to stop looking at the weekly bar chart!

  2. david varadi permalink*
    July 16, 2010 2:53 am

    no problem–i was actually chuckling at your comment as it is absolutely true.
    yeah that weekly bar chart will get you every time :o)

  3. July 16, 2010 8:30 am

    plus euro short-covering is approaching the 1.30 psycholoical level too!

  4. justin permalink
    July 16, 2010 6:38 pm

    hi david. does this mean you’re bearish on stocks?

  5. TopTick permalink
    July 21, 2010 2:05 pm

    DV: looks like you nailed it within hours of the low!

    • david varadi permalink*
      July 22, 2010 1:42 am

      thanks top, that makes it two in a row (with the market) I clearly had my share of good luck here hehe.

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