Greenback on the Ropes

I haven't commented on the US Dollar in outright index terms in quite sometime. So lets take a quick viewpoint of the greenback. In short, things at the moment are precarious. If the trendline drawn on the chart, using the end of Octobers data is broken and closed below by the end of November, I would argue that the dollar is heading for another challenge with the previous lows. Obviously if this is the case, then we are about to see the lousy Euro revers course and scream higher, stocks shoot past the 1200 level resistance and gold probably trade towards the 1800 range. In other words, it would be a market moving event.

In terms of the two other metrics shown on the chart, the ultimate oscillator at the moment is holding the midline or basically the line that I use to help in defining an uptrend or downtrend. Below the 50 and the bears lead while above is the bulls time to shine. A break of the trendline to the downside would tip this model over - a bounce would obviously do the opposite. In terms of the B%, it is residing in a downtrend but also holding the 25% level. A support though the price action needs to turn strong to the upside to reverse the downward trend in the indicator. Taken together, these both reside at support along with the trendline.

But while the chart is very compelling, I have to ask how much of a bounce would follow if it successfully holds. In short, if the Fed does not come through with the $1 trillion of bond purchases as the market would prefer (essentially monetizing the entire deficit in 2011), then the market is likely to take the dollar higher and attempt to take out the 80 level. Each bounce off this trendline has lead also to a challenge of the previous high. That would imply then a 10%+ move in the dollar and probably a nasty correction in risk assets.

via StockCharts.com
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