Greenback Gets Little Help Ahead of G-20
Fundamentals
The Dollar Index has seen a period of steady decline in September, after trading mostly sideways for the month of August. Despite many analysts forecasting a correction in equity prices, stocks have been extremely resilient, which has been a bearish force for the US Dollar. Yesterday's FOMC policy statement did little to indicate that this negative trend will reverse itself. The policy board indicated that a recovery is afoot, but also ruled out ending its own monetary stimulus. This means that the Dollar could face considerable pressure for the foreseeable future. There have already been signs that inflation is beginning to rear its ugly head in the most recent CPI report, which could further strain the economic recovery, thus resulting in the Fed keeping interest rates lower than previously expected.
Former Fed Chairman Greenspan warned the G-20 nations that the $9 trillion of fiscal stimulus spent globally to aid an economic recovery may haunt the leaders of industrialized nations. He also pointed to the fact that the US national debit has reached 84% of GDP, which could put pressure on US Bond prices and the greenback. G-20 debt will reach 82.1% of GDP by next year. It seems as though pushing through health care reform is the current administration's top priority, which could drive up the national debt even further, instead of trying to reign in debt. There is little one can say about the bullish forces that may influence the Dollar.
Trading Ideas
Given the bearish fundamental and technical forces working against the December Dollar Index, some traders may wish to consider entering into a bearish position. One such strategy could be a bear put spread, buying the December Dollar 75 puts (DXZ975P) and selling the December 72 puts (DXZ972P) for a debit of 0.60, or $600. The trade risks the initial investment for a maximum profit of 2.40 points or $2,400.
Technicals
The December Dollar Index chart shows prices trending lower, after breaking out of a bearish wedge ealier this month. Yesterday's doji candlestick suggests the contract may bounce in the near-term. There is nothing on the chart, however, to indicate the market may be nearing a bottom. The market is struggling to bounce back from oversold levels. The oversold conditions could slow the pace of selling near-term.
Rob Kurzatkowski, Senior Commodity Analyst
