U.S. dollar and other currency stories

NOTE:  Please click on the charts for better views.  I apologize that they are too wide.

I wanted to spend some more time on the U.S. dollar and the bull market that has begun this year.  I’m not one to go into the economic or political reasons for this.  I am a chart reader - and as amateur as I am at that you really don’t want me to spout off on politics and economics.  So in an attempt to read some charts on the U.S. dollar, we will start with a three-year weekly chart of the U.S. dollar index:

The last two years of damage done to the U.S. doollar has been undone in the past six months.  That, my friends is a sharp rise.  I’ve been following the UUP, which is a dollar bullish ETF, and I have been waiting for it to pull back to its 50-day moving average.  I have been waiting for quite some time.  Here is the chart of the UUP for the past year:

The dollar broke out in August, tagged support once and has been a profitable trade ever since.  But take a look back at the three-year chart - the dollar ‘bears’ who have been right on the dollar for several years, have had their last two years of profits disappear.  Do you really think they are going to take this?  Not me, being Mr. Cynical.  I see a bearish rally in the U.S. dollar over the next several months.  Why do I predict this?  I am going to post a 20-year chart of the U.S. dollar Index and it will be clearer:

Look back at 1991 and 1993.  These years experienced steep gains in the US Dollar which eroded away over time.  I would say that the Dollar was still in bear market territory in 1991-2 since it hadn’t made a ‘higher high’ or broken above a downward trend line.  In 1994, right after the 1993 rally, the dollar broke above the downward trend line.  Shortly thereafter, it went into the tank, found support in 1995 and began a nice long bull market.

So … after this steep rise in the Dollar, I am far from convinced we’re in the clear to buy.

So then, what to do?  If we can’t buy, what can we do?  Sell?  Maybe.  Or, we could buy the UUP’s evil twin, the UDN - Powershares Dollar Bear ETF.  Take a look:

I think the key will be for a break out above the $25.50 level in the UDN, and then we might be up for a good trade to $29 or so.  A potential 13% return.  Not too bad … if I am right.

There are other possibilities.  There are indices and ETF’s that track other foreign currencies.  When the US Dollar is strong, these are typically weaker.

Let’s start with the archenemy of the Dollar:  The Euro.  It has not had the best year.  Should the Dollar show weakness, look for a break in the Euro index above 131 to about 153 or so.  This can be traded via the FXE fund.

Then there is our neighbor to the North - the Canadian Dollar.  This currency showed resilience longer than the Euro, but it still went into a tailspin.  This can be traded via the FXC.  The short term support/resistance is not as clearly defined as the Euro and USD.  I would not try to trade this.

Getting back to Europe.  Let’s see the British Pound and the Swiss Franc. The Pound’s chart looks similar to the Euro in the timing of the decline.  However, the support and resistance are also poorly defined.  I believe this currency is due for another plunge in the short term.  The Franc, however, was having a nice year in 2008 right up until the Euro tanked.  Sure it was off its highs by August when the decline began, but one could argue that was merely a correction after a large upward swing.  The previous strength would lead me to believe that if the Euro bounces, the Franc will likely bounce higher than the Pound.  It is not unreasonable to expect this given my theory that the US Dollar will correct in the near to mid term.  The Pound can be traded via the FXB and the Franc via the FXF.

Moving to Asia-Pacific world let’s look at the Japanese Yen and the Australian Dollar.  Here we have two different stories.  Japanese currency is strong while the Australian Dollar is weak.  However, the Yen’s chart shows an interesting spike high in mid-October that acted as resistance in November - this could be a sign of further weakness approaching - look at a similar pattern in mid-March.  I would stay away from this.  Australia, on the other hand, might be due for a short term rally.  That November low was higher than the October low, which would lead me to believe that the downward push is over for now.  You can trade the Yen via the FXY and the Australian dollar via the FXA.

That concludes my world tour of currencies.  While I believe the long term trend is U.S. dollar bullish and Euro bearish, I concede that in the short to mid term, we will see corrections in both currencies.