Pros Are Watching This Chart Like A Hawk…
No doubt about it, the US Dollar has endured some tough sledding over the past few months. Ever since Ben Bernanke and the Federal Reserve announced an essentially endless 3rd round of quantitative easing (QE), the dollar’s been hard pressed to hang on.
Take a look…
As you can see from this one-year chart, the US Dollar index tested the longstanding 79 support area (blue line) in late January 2013. Of course, this technical support area is extremely important, as it’s the last line of defense against an all-out dollar drubbing.
Let me show you what I mean…
This longer-term chart clearly shows an ominous head and shoulders pattern in the US Dollar index. If the 79 support zone is broken, we’ll likely see a dollar freefall in the not-so-distant future.
And listen to this…
I’m not sure if you’ve noticed but there’s a lot of talk about a looming currency war amongst major developed economies.
What’s that mean?
Basically, the world’s major economic powers are in a race to devalue their currencies. You see, with global growth struggling to gain positive momentum, central banks will do everything in their power to strengthen their respective economies.
How do they do it?
One way is to drive down their currency’s value (the dollar for example) so exports gain the upper hand versus global competition. I don’t know about you, but I’ll put my money on Ben Bernanke and the US central bank winning that battle.
And that’s not the only bearish dollar news…
According to a recent CNBC interview, Chicago Federal Reserve Bank President Charles Evans says the Fed will stay accommodative until unemployment reaches 6.5%. Of course, that’s nothing new. Investors have known of the Fed’s 6.5% unemployment target for months now.
But what we didn’t know is that Evans believes it will take until 2015 before the unemployment rate drops to their target! In other words, we have two more years (at least!) until the Fed starts pulling interest rates out the cellar.
Not exactly what you want to hear if you’re bullish on the dollar.
However, don’t jump the gun and start betting against the greenback just yet…
You see, there’s another way this could all work out. With bearish dollar sentiment soaring, we may actually see the exact opposite of what most investors are expecting.
Take a look at that one-year dollar index chart again…
Notice how the index has compressed into a tighter and tighter trading range (blue lines) over the past few months. As you learned in last week’s copper article, tightening price action can be indicative of big price moves.
But here’s the deal…
With US stocks near all time highs, the odds of a substantial equity market correction are growing. And that means the next big move in the dollar could be higher. You see, a correction for stocks would drive investors right into the safety of the dollar, sending it skyward.
And with so many investors bearish on the dollar (and likely short) that means we have the breeding grounds for a short squeeze. As you may know, short squeezes can lead to violent short-term rallies.
So what should you do?
Nothing yet. We need to see a bit more information before taking any action on the dollar. However, if the greenback breaks below 79.00 (the bearish case), you’ll want to take a look at the PowerShares DB US Dollar Index Bearish Fund (UDN).
On the other hand, if stocks lose ground and push the dollar above 80.5 (the bullish case), you’ll want to take a look at the Powershares DB US Dollar Index Bullish Fund (UUP).
Now let me be clear…
Long-term, I still believe the dollar is doomed to fall. But that doesn’t mean we can’t see a few short term rallies in the meantime!
Until Next Time,
Justin Bennett
Category: Currency Trading
