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There can be no argument that the US Dollar has taken a beating over the last six months. Whichever currency you compare it with, the picture has not been pretty for the greenback.
Last week we saw the official Fed announcement of “QE2” – or the second round of quantitative easing and the general consensus was that this would weaken the US Dollar. While I believe the US Dollar will face some pretty tough challenges ahead, I think the greenback may have fallen as far as it is going to fall for 2010.
After the announcement by the Fed last week, the US Dollar fell for a couple of days but has since then staged a rally. Let’s take a look at the US Dollar compared to some of the major currencies.
In Chart 1 below, we see the Euro compared with the US Dollar (FXEUUS in ProfitSource).
Chart 1
click to enlarge
The Euro has rallied strongly against the US Dollar from the early June low, up to its current November 4 high. Since the November high, we have seen three straight days of losses for the Euro, a fall of some 500+ points. This is setting up nicely for a potential Overbalance in Price short trade for students of Safety in the Market and WD Gann.
The November 4 high also appears to be a false break of the October 15 high, with the market quickly falling back below this old top. A false break to the upside shows that the Euro is perhaps running out of steam –opening the door for a US Dollar rally.
In Chart 2 below, we see the US Dollar paired with the Japanese Yen (FXUSJY in ProfitSource).
Chart 2
click to enlarge
The US Dollar has been falling against the Japanese Yen since early May but has been tracking sideways for the past month. There are plenty of technical reasons for the US Dollar to be at or near a medium term low against the Yen, however my concern is the pattern of the market. Previous lows on the US Dollar/Yen pair will often see a sharp drop followed by a quick snap-back or slingshot out of the low. In this case, we have just seen a sideways move.
In Chart 3 below, we can see the much discussed (well, in Australia anyway!) Australian Dollar against the US Dollar (FXADUS in ProfitSource), which at time of writing (Wednesday, November 10, 2010) is just hanging above the magic parity level (1.0000) by about 20 ticks.
Chart 3
click to enlarge
The Aussie Dollar briefly touched the 1.0000 level on October 15, making a short term high on the same day as the Euro, but unlike the Euro it is still trading above this high, although only slightly.
Given the six month period of a rising Aussie Dollar (and a falling US Dollar) I would not be surprised to see the Aussie Dollar give back some of its gains by Christmas.
I am long term bearish on the US Dollar, however I am still seeing signs of life in the greenback. I expect the Dollar to put up a fight and stage a comeback in the coming months. Since it has taken a beating over the past six months, this fight back may be quite impressive, possibly even resulting in a mini-crash in some of the overbought currencies.
I will be watching this market leading into Christmas to see the size of the pullback. The size of the current pullback will give us an insight into how much fight there is in the US Dollar – if at all.
Be Prepared!
Mathew Barnes
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