Dollar

This is an update to our earlier post "Dollar versus Renminbi"
http://maybeitsclarke.blogspot.com/2008/07/dollar.html

We were clearly myopic in our vision of the dollar then. We were made to eat our words by the action in dollar this week. As can be seen from the charts above (dollar and Euro), the dollar has broken short term down trendlines and the euro is now a bearish looking chart with divergences all over. One might ask, what was it that the FED did right to strengthen the dollar, nationalize Fannie and Freddie's debt was infact bad for the dollar? Well, it seems that the ECB by not increasing interest rates has stated that growth in Europe is stifling, meaning our friends across the atlantic are also in mess. Technically, the euro chart has been in a bull run and was beginning to show topiness (with bearish divergences). It is now beginning to correct.

We believe this is the time when the fibonacci retracement will occur. These retracements are healthy for the trend. We believe by Dec end, the dollar could break its 3-year steep downtrend line and touch the 81 mark. Conversely, the euro could drop to the low 140s depending on how badly europe does. We will know better as the charts fill in and momentum indicators fill in. Mind you, breaking a descending trendline, doesn't mean there is an uptrend, it only means the rate of descent has lessened. This is what will happen with the dollar. The macro-economic view point is as the dollar weakens, the exports will gain strength and imports hurt - meaning the current fiscal deficit will start shrinking. This is necessary medicine for the US, which has been binging the past decade.

As for the short term, the next week or so, for the dollar, the first hit of such a long lasting trendline after a huge rally of the bottoms serves as resistance. This could happen sometime next week. The trade would be to sell any commodities into strength and to buy short basic materials especially steel on any pullbacks in SMN.

Do we think the commodity markets are dead? This is a story for another post.