Greenback Under Attack
Fundamentals
The US Dollar Index has taken a severe hit since the rally in equity prices began in mid-March, and there may be little let-up from the bear camp. Equity prices have shown resiliency, as traders point to more upbeat housing and manufacturing data. The increased appetite for risk has made the defensive currencies - the greenback and Yen - unattractive to investors. The current administration's increase in government spending has provided traders another reason to be short Dollars. The currency's value is determined by supply and demand, and the current rate at which money is being printed is unsustainable if the government wishes to prevent further declines in the exchange rate. Traders will be keeping a close eye on the progress of health care proposals before both houses of Congress. Passage of such a plan will likely increase government spending by a much greater degree than current estimates. The lack of interest in government debt has also put downward pressure on the Dollar, so it would probably be wise for traders to closely watch the upcoming 3, 10 and 30-year auctions next week. Lackluster results could be a sign that investors are concerned with both the amount of debt printed and the exchange rate of the Dollar.
The rapidly falling Dollar has resulted in commodity prices increasing at a rapid rate, which could impact the economic recovery at hand. Commodity prices, namely Crude Oil, have increased at a rate which defies logic. This could ultimately become a positive factor for the Dollar if investors begin to question whether the US economy can recover in the face of higher energy prices. This could result in a pullback in global equity markets, which, in turn, could result in investors returning to Dollar-based assets as a defensive play. This scenario does not seem likely to unfold in the near future, as traders have been blinded by talk of green shoots and the end of the recession. While the recession may be nearing an end, the unemployment rate does remain extremely high, and household incomes are falling, suggesting American consumers are ill-equipped to deal with rising energy and food costs.
Trading Ideas
The near-term fundamental and technical outlooks suggest that the Dollar Index may continue to fall. Normally, traders would simply be able to enter the short side of the futures market via the futures contract, but this Friday's non-farm payroll number can be seen as a wildcard and could cause an increase in volatility. It may perhaps be wise to instead enter into a bear put spread on the Sep Dollar Index to limit exposure. Some traders may wish to buy a September 77 put (DXU977P) and sell a September 75 put (DXU975P) for a debit of 0.60 or lower. This trade risks the initial investment of $600 per spread for a maximum profit of 1.40 points, or $1400, if the September futures contract closes below 75.00 on the September 4th expiration date.
Technicals
Turning to the chart, the September Dollar Index shows prices falling below support at 79.00 and heading toward the next significant support areas at 76.00 and 75.00. The 75.00 level, in particular, can be seen as significant, as failure to hold this level could result in the Dollar Index testing all-time lows at 71.05. The weekly chart shows the market confirming a double-top formation. The measure of the pattern suggests that prices could test the 70.00 mark. The RSI indicator is currently showing oversold readings, as are the Slow Stochastics, suggesting prices could see some near-term support.
Rob Kurzatkowski, Senior Commodity Analyst
