Wednesday, November 3, 2010

U.S. Dollar About 1% Away from a New Breakdown

About 3 weeks ago, I thought "short U.S. dollar" was a crowded trade - the darn thing was under so much pressure since the Jackson Hole, Wyoming "QE2 is coming to a theater near you" announcement, it could not even break above the 5 day moving average.  In the very near term this was the right call, as finally a mini dam burst (that was the day China raised interest rates) and the dollar rallied through the 5 day and to the 20 day.  But that is all that it could muster as it was firmly rejected.

Now it sits at the precipice of a very dangerous area (if you have your savings in U.S. dollars ... ) - if the dollar index breaks below the low $76 area, a new round of selling appears on the horizon.   Let us see the knee jerk reaction in currency markets the next few days - keep in mind after the Fed acts, the Bank of England, and ECB announce tomorrow, and then the Bank of Japan has moved up its meeting to Friday.  The only saving grace for the dollar potentially is some lewd acts by central bankers overseas to try to mimic Bernanke, in the global race to the bottom.

If indeed this new leg begins it would set off a chain reaction as it should mean everything priced in dollar rallies (again) - that is simply a mechanical operation - you lose 2% of purchasing power, but everything priced in dollars gains 2%.  Since so many assets are at key levels (S&P 500, oil, etc) the algos could go wild playing their correlation games.

Please note, I am long dollar as a 'hedge', put on a few days before that counter trend rally that finally got the USD through the 5 day moving average.  But if the greenback breaks to new lows, this trade has to be abandoned because frankly, the downside is unknowable at that point.  The next support seems to be $74, and if that does not hold $71s area.  After that, it's just a cold sweat.

Long Powershares Dollar Bullish in fund; no personal position


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