Dollar Bottom?
Today's Idea
As with most greenback rallies over the past decade, the rebound was triggered by outside market weakness rather than of its own merits. This is why many currency traders are cautious calling a long-term bottom in the Dollar Index. Technically, the greenback has made some progress versus its global counterparts, but some traders would like to see further technical confirmation. At the very least, it does seem that the selling pressure in the greenback has subsided. For this reason, some traders may wish to consider selling a June 73 put at 0.10, or $100. The maximum profit would be the initial credit and the trade has unlimited loss potential, so traders may wish to temper the risk by exiting the trade on a close below 73.50.
Fundamentals
The Dollar Index seems to have found a bottom, at least in the near-term. The EU debt situation has triggered a flight from the Euro and the correction in commodity prices has lessened the appeal of commodity currencies among many traders. The Euro had dropped 7 cents in recent sessions and is swiftly approaching the 1.40 level, which can be seen as critical support versus the greenback. The Euro makes up over 58% of the Dollar Index's weight. Many commodity traders have repositioned themselves in cash due to the recent market volatility and will likely not re-enter the market until some sense of order is restored. The pressure that commodity prices have felt is a bullish force for the greenback due to their inverse relationship. The Bank of England stating that rate increases will be coming sooner rather than later could be seen as Dollar bearish on the surface. However, it could be a sign that central banks around the globe will be tightening their monetary policy, further pressuring commodity prices. Given the indifference to sound fiscal policy by the current and previous administrations, the US has amassed a huge amount of debt. For this reason, the Dollar rally is rather fragile and could suffer setbacks if commodity prices were to rebound and/or the EU finally comes up with a meaningful debt restructuring plan for Greece.
Technical Notes
The Dollar Index chart shows the June contract crossing its first technical hurdle at the 75.00 level. Due to the Dollar's slow, grinding descent, the chart has formed numerous minor resistance levels along the way at the century marks. The next resistance levels can be found at 76.00 and 77.00. Longer-term, traders would ideally like to see the 79.00 level taken-out to offer confirmation of a reversal. The recent rebound in prices has caused the RSI to reach near-overbought levels, which could slow the rally or stall it all together. Prices are trading above the 50-day moving average this morning. If prices are able to hold above the average, it could add to technical momentum.
Rob Kurzatkowski, Senior Commodity Analyst
