Dollar Doldrums
Fundamentals
The Chinese economy expanded at a robust 10.3 percent, sending the US Dollar Index lower in overnight trading. The US currency has been a defensive play for many investors concerned with the European debt crisis and possible weakness in the Chinese economy. Although the growth rate in China was 1.6 percent lower than the first quarter of the year, the results were still much better than many had expected. This could open the door for more aggressive investments and lead to further declines in the value of the US Dollar. China's trade partners -- namely Australia and Japan -- could see new life for the value of their currencies. The recent gains in equity prices have also hurt the greenback, as some traders have flocked to riskier investments in the form of stocks and commodities, while defensive players have favored Gold over greenbacks. Unless equities hit a major bump in the road, the US Dollar could continue to tumble.
Trading Ideas
Things have turned sour rather quickly for the US Dollar. The US currency was riding the panic wave higher, and investors couldn't have enough greenbacks. But with European panic settling down and the renewed optimism in the US and Chinese economies, investors have dumped the currency. As the chart shows, the market has hit a major reversal after the head and shoulders top formation and is heading toward major support levels. For these reasons, some traders may wish to consider taking a bearish position by entering into a bear put spread. For example, possibly buying the Sep Dollar Index 82 puts (DXU082P) and selling the Sep 80 puts (DXU080P) for a debit of 0.40. The trade risks the initial cost of $400 for a potential profit of $1,600 at expiration.
Technicals
Turning to the chart, we see the September Dollar Index trading below the 100-day moving average for the second consecutive session. This can be viewed as a major long-term setback, unless prices are able to cross back above the average in the near-term. Prices are quickly approaching a fairly significant support level between 83.00 and 82.50. This may be the last stand for Dollar bulls. If the market is unable to hold support here, prices could possibly test 80.00 on the downside, which is a major technical and psychological support level. The RSI is now giving oversold readings, which could provide some short-term relief for the index.
Robert Kurzatkowski, Trading Specialist
