Currency update week ending 08 August 2008

For the past week, the ONLY story worth watching was the movement in the U.S. dollar.

For the week ending August 08, the USD index gained 3.29%. To put this into perspective, this was the biggest single-week movement in the USD over the past 8 YEARS.

Here are the weekly stats versus major world currencies:



The reasons sighted for this move were numerous but in my mind it comes down to 2 things:

1) the realization that the Euro zone economies (and by extension the rest of the world as well) are in possibly even worse shape going forward than the U.S. is, and

2) the global asset rotation out of dollar based commodities (mostly oil but also soft commodities as well) and into financial instruments (banks, brokers, etc) and sovereign debt (mostly US 10 year treasuries).

The million dollar question is whether this is truly a bottom in the USD or merely another bounce along its ultimate road to the bottom.

To put this into perspective, I created a series of "XX vs USD" ratio charts going back 10 years. I find it useful to monitor these ratios’s to give me an idea of where we stand in the big picture (click on all charts to expand):


Euro vs USD




British Pound vs USD




Australian Dollar vs USD




Canadian Dollar vs USD



As can be seen, we are still above the long term trend lines in all the major currencies with the exception of the British Pound. As such, it is still inconclusive from the big picture view based upon ratios that this is the start of something big.

Next I want to zoom into specifically the USD Index. First the long term monthly view:



When everyone thinks about the USD decline they tend to refer to its most recent decline from 2002 to present. In fact, the USD topped at 160 in Feb 1985 and has been on a decline ever since.

Key points:

1) The rise from it's Sept/1992 bottom to it's Jan/2002 top retraced almost exactly to the 50% Fibonacci retracement level (50% Fib = 119.81, topped @ 120.24). As such, it could be expected when the USD finally does turn around we could expect a similar upward correction in price.

2) Strong resistance is located at the 79.12-80.81 price level. Until that is broken it is premature to get too excited about a USD rally.

3) It is worth noting the declining trend line and the 12 month simple moving average. A sustained break above both on a monthly closing basis would be an encouraging sign a true turn around is in place.


Next chart is the USD 3 year weekly candlestick chart:



Key Points:

1) It appears a double bottom may have taken place at the 70.70-71.31 price level. This is frequently the sign a bottom has taken place and is encouraging.

2) The ADX (14) has crossed to positive. The last time this occurred was Sept/2005.

3) Price broke through key resistance levels at 74.31-74.48. In addition price broke through the 50 week moving average @ 74.97. To have such a strong up week that breaks significant resistance levels is a very bullish sign.

4) Note price has been repelled at the declining trend line since Feb/2006. Numerous attempts to break above this trend line have failed. As such, this line represents the best indicator of whether this is truly a trend change or just another dead cat bounce in the USD. The price level of the trend line currently sits around the 76.50 level.


Next chart is the 10 year daily chart:



This chart nicely shows the declining trend line from 2005 that I mentioned previous. Until I see a closing price that breaks above this trend line the direction of the USD remains down.

Disregard the bottom indicators on the chart but note the top indicator; the 14 day RSI (relative strength indicator). This is an oscillator that is useful in indicating the degree to which a market is overbought (RSI>70) or oversold (RSI <30).

Note that the last time the RSI was at it's current level (80) was in April/2000. Following a reading of 80, the RSI rapidly declined to the low 30's taking the USD down by approx 6% before resuming it's up trend. I expect a similar thing once again as the USD is now severely overbought on a short term basis.


Next chart is the 6 month daily candlestick chart: