USD Update 28 February 2008

It was another historic day for the USD yesterday as it broke below it's previous support and is now probing newer lows.

The synopsis of what happened has been pasted below from Daily FX with my charts following:

Fed Report Points to Further Rate Cuts, Dollar Accelerates Its Record Breaking Declines

• Fed Report Points to Further Rate Cuts, Dollar Accelerates Its Record Breaking Declines

• Euro, Backed By Strong Data, Blows Through 1.50 Against The Dollar

• Australian Dollar Joins Its New Zealand Counterpart At Multi-Decade Highs

Written By: John Kicklighter, Currency Analyst

Fed Report Points to Further Rate Cuts, Dollar Accelerates Its Record Breaking Declines

Since the dollar marked its unfavorable milestones late in the US session yesterday, traders around the world have jumped in to sell the battered currency. Now at record lows, bulls have quickly lost hope in a possible rebound from an overextended greenback. In fact, looking across the market, we have seen the influences of an unwanted dollar on otherwise sound technical formations among the majors. Momentum in EUR/USD pushed the pair through the closely watched 1.50 level and quickly surpassed 1.51 in the same session. Those currencies with high yields and hawkish central banks proved especially attractive to those wanting to short the dollar. NZD/USD rallied to a new multi-decade high of 0.82 while the Australian dollar broke to a new 23 year high. This follow through momentum wasn’t found on sentiment alone, however; Fed Chairman Ben Bernanke’s semiannual testimony before the House Financial Services Committee certainly played its part. Few major changes were made in the central banker’s outlook for economic activity and Fed policy from last week’s minutes from the January 29-30 FOMC meeting; though his commentary did confirm the outlook for further policy easing. In his testimony, Bernanke said the policy group would be “carefully evaluating incoming information bearing on the economic outlook and will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks.” In addition to his concern for growth, Bernanke had also recounted concern over inflation trends. While these worries have been present in the Fed’s commentary for some time, more media outlets and analysts have connected the dots and taken these forecasts to mean the economy will fall into a period of stagflation. Besides the Fed Chairman’s dour commentary, the market had further reason to sell dollars from two disappointing indicators. The Commerce Department reported a 5.2 percent drop in durable goods orders – the biggest such contraction in a year – predominately due to the drop in consumer sentiment and its expected effect on American’s spending habits. And, keeping the pressure on the housing market’s recession, new home sales dropped a greater-than-expected 2.8 percent to a 588,000-annual pace, now the weakest since 1995.

Euro, Backed By Strong Data, Blows Through 1.50 Against The Dollar

While the euro’s advance against the US dollar was generating a broad demand for the currency in most of its liquid pairings, the move also had its fundamental roots as well. Tuesday morning saw the release of a few indicators of economic import and fundamental influence. The January reading of M3 money supply growth cooled less than expected. An 11.5 percent pace of annual growth in the money supply is the second consecutive deceleration; yet this objective inflation reading is still near the 28-year high set back in November. More hawkish in its inflation support was the German import price index through the same month. Despite the deflationary influence of a record high euro, the inflation report hit a 16-month high 5.2 percent clip attributed largely to a sharp rise in energy prices. Elsewhere on the German docket, the GfK consumer sentiment survey followed the lead of the IFO business and ZEW investor confidence reports. Though still near a two-year low, the indicator fended off an expected downtick to hold at 4.5 for the third consecutive month. All of the hard data aside, the true market moving news for the day was actually commentary. ECB Member Axel Weber remarked in a speech that the market’s consensus expectation for a rate cut from the ECB was underestimating inflation trends. These comments were a clear signal for euro traders, which were holding back from bidding the euro on the forecast that the ECB will have to follow the Fed’s lead, to join the now aggressive rally.

Australian Dollar Joins Its New Zealand Counterpart At Multi-Decade Highs

The commodity bloc leveraged the day’s anti-dollar sentiment. Leveraging speculation of a follow up rate hike from the RBA at their next week, the Conference Board’s December leading economic index rose for a fifth consecutive month. The Canadian dollar added little distance to its 300 point rally against the greenback over the past two days as Fin Min Jim Flaherty projected the nation’s budget surplus would drop 77 percent in 2008 and shrink to decade low in 2009. Finally, the New Zealand dollar would perform actually drop against the US currency. Business confidence plunged to a 9-month low according to NBNZ with profit forecasts and hiring plans fading.

British Pound’s Rally Fades As Anti-Dollar Sentiment Takes Over

The tether between the UK and US economies seems to have kept the British pound from participating in a market-wide, anti-dollar rally. Indeed, while EURUSD shot another 150 points above yesterday’s close to new record highs, the pound-backed major produced an ugly reversal candle on a failed run to 2.00. Mirroring the sentiment in Fed Chairman Ben Bernanke’s discouraging speech on monetary policy across the pond, the first revision in the British fourth quarter GDP numbers printed a number of disappointing modifications. Though annual growth held a 2.9 percent pace, fixed capital investment dropped 0.5 percent, imports 1.2 percent and exports 0.5 percent.

Carry Trades Plunge As Risk Aversion Reigns

The economic docket was light for the low yielding Japanese yen and Swiss franc, through their aggressive advances would not have suggested a shortage of scheduled fundamentals. Instead of economic indicators, traders’ interest in these carry trade favorites came along with a broad pull back in risk appetite. Growing fears of an economic recession (or worse, stagflation) was a particularly ominous sign for the global economy. A similar sentiment was measured in equities and the increasingly speculative energy market.

When I scaled out of equites and into cash starting in August 2007, I allocated 25% to USD cash for the following reasons:

1) from a fundamental point of view the belief that the market was so totally one sided towards short USD/long Euro, Aussie, Pound, etc that from a contrarian point of view buying the USD looked reasonable, and

2) fr0m a technical point of view it looked like the print low in mid-November @ 74.48 would offer a strong level of support.

As of yesterdays close, the support level has been broken so it is time to look again


First chart is the 2 year daily line chart (click on all charts to enlarge



The descending channel that extends back over 3 years is well defined. Note a smaller range descending channel has been established as well so any upward price movement should be contained by the smaller channel.

The price has broken below support @ 74.48. This is a reconfirmed bearish signal and allows for a recalculation of projected Fib targets based upon the anchors of 77.85 and 74.48. The new short term price targets for the USD based upon yesterdays breakdown are:

72.41
71.12
68.98

Note that the RSI is now re-entering oversold territory so a bounce could be expected; however there is no technical evidence now that the USD has found a bottom.


Next chart is the USD 3 year candlestick chart:

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Here the well defined downtrend channel that formed all the way back in January 2002 (shown on the next chart) can be seen clearly. The MACD issued a long term bearish signal in April 2006 and that has yet to reverse. Until the MACD were able to recover above zero the long term downtrend remains intact.


Next chart is the USD 10 year weekly line chart:



The downtrend line is clear. What is interesting to note on this chart is the Fib projections I made when the USD broke it's previous "bottom" @ 80.81 back in mid-2007. Those targets have been in place since then.

Note that the first projected target was 73.88 (based upon the anchors of 92.04 & 80.81) so we are getting close to my first target. As we approach this point it will be interesting to see the price action. Also interesting to note the 2nd price projection on this chart is 69.54........a reminder the latest break Fib target based upon totally different anchors (discussed above) has a 3rd target of 69.07. So it is reasonable to assume the bottom of this decline could come in at the 69.07-69.54 price level.....a further decline of approx 6-7% from current levels.


Last chart is the USD 20 year montly chart:

This chart is very interesting. I posted it some months ago but thought it was time to revisit it.

Here are the key points to note:

1) the USD has been in a decline since Feb 1985 where it topped @ 160.41.

2) the first wave of the decline ended in September 1992 @ 79.12. This was a 7 1/2 year decline (90 months).

3) the countertrend rally from Sept/1992 to Jan/2002 retraced almost exactly 50% of the down move (to be exact, 50.67%). It can be seen the 50% Fib retracement from the high to the low acted as the next level of resistance before the downtrend resumed.

History does not repeat itself but many times it does rhyme. As such, it is simple to project the following based upon previous market action:

-since the top of the current downtrend was Jan/2002; a 90 month decline would put the next USD bottom occuring in July 2009.

-the amount of the previous correction was 50.67%. Should the same occur the USD is calculated to bottom at 60.92 before the next upleg.

Note this is very close to the 3rd projection on the 10 year weekly line chart @ 62.58. Makes one go "Hmmmmmm". If so, that is a further 15% decline from current levels.


Bottom Line:

I will be switching my 25% position out of the USD tomorrow and into the Aussie dollar. Both the Euro and the Aussie dollar have been stellar performers (charts to come soon) but I already have a 25% weighing in the Euro so diversification makes sense at the present time. The British Pound is not nearly so strong; I will avoid it at this stage as it seems to be caught in the downdraft of the USD.

I hate "going with the crowd" on this trade but there is no doubt the US government is devaluing the USD on an unprecedented level and you cannot "fight the tape". The ultimate technical indicator is price and price is in the toilet for the USD. It is what it is.

Charts will follow today or tomorrow for the other currencies plus stocks plus bonds. It has been a very turbulent week technically so changes need to be made in my account. I will post them with the updated charts.