We have been saying for a while now that the US Dollar is overdue for a bounce and the price action of the past week or so is starting to shape up as a possible launching pad for a more sustained rally.
The 10 day/35 day moving average has just crossed over and the steady downtrend of the past 6 months has been breached.
If you have a look at the chart you can see that I have marked out the range from late 2008 to early 2009. This range was between 79 and 90 and I believe that range still has an influence over current price action as strange as that may seem.
The bottom dotted line is calculated as 50% of the above range below the low of the range. Most false breaks that occur will usually be contained within this area as I have said in the past. The current rally could easily turn into a fake out and it is by no means certain at the moment that this rally is going to turn into a change of longer term trend, but the signs are there that we should keep a closer eye on the price action in the US Dollar in the coming weeks to gain an insight into the direction of overall markets.
More than at any time in recent memory, the US Dollar has become the lynchpin in the direction in nearly all markets. The US Dollar carry trade is funding most of the speculation worldwide so it is imperative that we understand what the immediate future of the US Dollar is if we are to make money over the next year or so.
The US Fed has indicated that they are on hold with their interest rates for the foreseeable future. This has been taken by the markets to mean that most of 2010 will see steady and very low interest rates in the US. This means that it is open season for the banks and whoever else has access to the very cheap funding until the Fed comes out and says otherwise.
As a result we should expect the long term downtrend of the US Dollar to remain in place over the next year or so until there is confirmation that their interest rates will rise.
This does not mean however that we will not see sharp short squeezes which can be vicious and very expensive if you are caught off guard.
Both gold and oil have been taken down in the last few weeks as the US dollar has rallied and we could expect that to continue until the dollar falls over again.
The key area to focus on is the low of last year’s range which is 79. This will act as fairly strong resistance on the way up and it would be an area where we could see the dollar reinitiate its down trend. If the dollar was to break this level and re-enter last year’s range then we could see a strong and sharp rally to the midpoint or Point of control of the range which is 84. A move such as this would really put the cat amongst the pigeons and would see a large correction in markets worldwide.
It is not until we are above 79 that I would be willing to call a change in the intermediate trend, until then this rally can easily fall over.
Editor, Slipstream Trader
for Markets and Money