End of dollar's latest rally. 10 Feb 2005

[GoldChild]

I trade longer term moves so I'm sticking my neck out here again but a whole 7 of my medium term indicators are all flashing together marking the top of this dollar rally right now. I have some doubt as dollar bearishness still seems high and 3 of them are lagging indicators though so it may have one more boost in the next week.

[mahras]

I am not sure about that though. At least not till the trendline is broken. The EURUSD seems to be following a range. Can you give us some more details about the indicators you use?

[GoldChild]

Mostly looking at the long term trend for the USD.
http://stockcharts.com/def/servlet/SC.web?c=$USD,uu[m,a]waclyyay[df][pb8!b21][vc60][iUb14!La12,26,9]&pref=G
This is getting to the top of the channel again. A firm breakout will of course change my mind.

Another is Gold's 200dma which it looks like it is about to bounce off of again. Two lagging indicators are the rise in the RSI and MACD which shows best on this chart http://stockcharts.com/def/servlet/SC.web?c=$GOLD:$USD,uu[m,a]waclyyay[de][pb8!b21][vc60][iUb14!La12,26,9]&pref=G which exagerates the rsi a bit.
The RSI has ticked up but only just. Just waiting for the MACD.

Another indicator that has been a good buy signal on previous swings is the actual convergence of the 8 and 21 week ma (~50 and 200 days) shown in blue and red. Last time (March 04) this and MACD gave a false signal so I'm interested to see so many line up this time.

I haven't previously used them but Cliff Droke has also noted that the Stochastics are showing an upturn too.

All these signals are clearer on Gold/USD charts than Eur/USD which is why I trade it (plus margins of gold are less). So far it's been the dollar's value that been driving the moves more than gold's so unless gold takes off in Euros too this looks a lot like the previous 4 swings and most agree that the long term trend for the dollar is still down.

[Smurf1976]

Am bullish on the US Dollar for 2005 as a whole BUT:

AUD looks to have broken out to the upside. I focus on AUD primarily because: 1. Relationship to commodities and therefore world economy. 2. Easier to keep track of the fundamentals since I live in Aus.

Various gold stocks and the gold indicies have broken out too. One gold stock that I follow is up something like 30% in a couple of days whilst many others look to be breaking out on a daily chart.

Not too sure about the rest of the world but Australian oil stocks have not fallen much since the oil price peak 2004 and, depending on which stock you look at, are on the way up again. Some never stopped rising... Now, if the AUD is rising and so are the oil stocks and international gold stocks then that implies a few things about the gold and oil price. Both of these are, of course, related to the USD.

Best guess, a fall in the USD is the next move but at some point this year it might have a decent rally above recent highs. Don't take that as a recommendation though.

[GoldChild]

Are you really bullish on the USD or do you mean your bearish on the Ozzie?

[Smurf1976]

Both bearish on AUD and bullish on USD for the moment.

It is my view that at some point during 2005 USD will surprise to the upside an reach 90 - 100 on the USD index. I think that the AUD will fall regardless of what USD does since the fundamentals absolutely stink once you look beneth the surface of the commodities bull. Australia's current account deficit makes the US trade situation look like nothing to be at all concerned about in comparisson (though there is still plenty to be concerned about).

Long term I am not keen at all on USD but if it really does tank and looses world reserve currency status then that would be associated with the decline of the US itself. Such are the massive benefits of issuing the world's reserve currency.

There is EVERYTHING to lose for the US if the Dollar goes down completely. I just can't believe that it would be allowed to sink completely without a truly massive fight.

The situation came too close late 2004. USD bears everywhere. Even on popular non-financial TV programs. At that point there was a choice - the USD and with it the USA and the world economy goes down or something is done. With talk of central banks dumping USD, the time had come to face reality.

My bet is that central banks "do something" as the world is not, yet, ready to see the demise of the US. Hence I expect a decent attempt, which will be successful for now, to "save" the USD. Thus my expectation for a decent rally during 2005.

Timing. I am not at all convinced that we are seeing the start of this rally at present although it is possible. AUD is, in my opinion, still rising for the moment and USD is falling once again. I would not be at all surprised to see USD Index bottom around 78 this year and AUD top around 82 - 84 us cents.

Of course I could be completely wrong. I always take positions according to the evidence available rather than personal opinion. It just seems to me that there is too much to lose if the USD goes down whilst AUD stands out as being on borrowed time. As I said, I could be wrong.

At present I am long AUD / short USD but will reverse when the technical market evidence suggests that the time has come. I expect this to be within a few months. Note that I take long term positions only and do not day or swing trade, hence my longer term focus on underlying trends.

[20pipsaday]

Interesting thoughts about saving the USD etc etc

I am not sure how achievable it is in practice though? it seems there are such severe structural problems with the US financial system (and the USD) that I cant see a gameplan that would work to rescue the USD? (long term)

the US currently absorbs 80% of the worlds savings, and that number increases every quarter. Just doesnt make sense..... at some point people need to spend their money, why would the savings flow never reverse? even worse at some point what if the USA needs more than 100% of the worlds savings to keep the debt engine running

what is the australian acc deficit relative to GDP? its hard to short that AUD because of the interest rate

[Smurf1976]

Australian current account deficit is 6.5% of GDP and rising. Most commentators suggest around 7% later this year.

New Zealand comes in at around 6% followed by the US.

My thinking about how the USD would be defended is higher interest rates. In short, as high as is necessary. Given the choice between sending the domestic ecomomy into the ground or letting the USD sink, I think that the authorities would choose to defend the Dollar due to the broader implications.

The status of the USA as a country depends heavily on the status of the USD being maintained due to the enormous benefits which come with issuing the major world reserve currency (hence why others would like to be in that position). Would the USA willingly lose its world superpower role as it surely would with a USD collapse?

I just can't believe that the authorities wouldn't do everything, anything, possible to prevent that regardless of the consequences. I mean, it is difficult to imagine a worse scenario for the USA. We are talking about the collapse of an empire after all...

Another point is who exactly is left to sell USD. It is hard to find anyone who is NOT a USD bear. Even I am short USD at present (but looking to reverse that at the right time). Unless central banks really do dump Dollars (which they could, but I doubt they will do it this year) there is nobody left to sell.

True, the USD needs constant buyers to stay afloat but then the everyone is effectively short USD and of course there are the political consequences in the case of central banks. If they haven't already sold / stopped buying and the US is raising rates and at least acknowledging the need to take action then then why would they suddenly decide to sell / stop buying now? Wouldn't they have already done last year if they were going to? Obviously they might in the long term, but in 2005 when they had such an obvious opportunity last year?

Australia is not in a position to meaningfully increase interest rates due to the housing bubble, which is clearly bursting with prices dropping at an alarming rate in some (major) locations. Two 0.25% rises would likely be the absolute limit regardless of what the US Fed does.

The AUD / USD interest rate differential will thus fall unless the Fed halts the US rate increases. But if the Fed does stop raising rates then that would likely signal a weakening world ecomomy. In that case, "pop" goes the commodities boom and then Australia really is in trouble.

So, the way I see it Australia has a problem either way unless export VOLUMES can be greatly increased. Possible but then everyone is running at or near capacity and the government has been talking about a volume increase for years but so far it has failed to occur.

Right now the Prime Minister and other senior officials are very publicly warning of "tough times ahead" for the economy. Perhaps I am being somewhat cynical but this in itself makes me a little worried. I mean, a politician talking the economy DOWN isn't an everyday occurrence...

I still expect AUD to rise for a while and I am undecided about USD index (another test of the all-time bottom on the way?). But then I think we see a reversal of most recent trends including currencies and stocks. USD up and AUD in particular down is my expectation.

I think the recent action of gold stocks is telling us something. Question is what. Gold starting to rise in terms of all currencies? USD is really going to crash this year? Oil crisis? War? Terrorism? Just a gold rally? I don't know but I think something is up.

I do acknowledge that I could be completely wrong about my assumptions. That's why I'm on this forum...