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Dollar Index Climbs a Wall of Worry

Wednesday, October 5, 2011

One of the biggest beneficiaries of the recent European debt crisis has been the US Dollar, with the Dollar Index futures rallying over 6 full points since the end of August. Should Greece finally be forced to declare some type of default on its obligations, we may see a knee-jerk reversal of the recent trends, as one of the major "concerns" will have finally been settled. Some traders looking for a big move in the Dollar index but with a bearish bias may wish to consider exploring a put back spread. For example, with the December Dollar Index trading at 79.860 as of this writing, the December 78 puts could be sold and 2 December 76 puts bought for a 0.10 credit, or $100 per spread, not including commissions. Ideally, this type of trade should be done as a net-credit, as that increases the potential band of prices where the trade will be profitable at option expiration in December.

Fundamentals

Fear of the unknown is certainly prevailing in the financial markets, as many traders appear to be focusing their concerns on what will occur if/when Greece defaults on its debts. It is this delay of what appears to be inevitable that is spooking the markets and causing a move away from more risky assets and into the so-called safe havens, such as US and German government debt and the US Dollar. If that was not enough, signs of a slowing Chinese economy have sent commodity prices tumbling, and now there are threats of a possible trade war between China and the US should a proposed Senate bill that would require "penalties" against nations deemed to be undervaluing their currency. All this "potential" turmoil is reviving memories of late 2008 and 2009, when the collapse of Lehman Brothers sparked a steep decline in equity and commodity prices and set the stage for a global slowdown/recession. The new "sell first ask questions later" mentality has sent some markets, such as Copper, Platinum, Corn and even some equities, to price levels that seem to be factoring-in a global malaise worse than what occurred in early 2009! What it will take to change the psyche of market is currently unknown, but it usually takes some sort of catalyst to trigger a change in trend, and ironically, it may take an actual "default" on Greek debt to trigger a move back into commodities -- especially if the worst fears of investors do not materialize

Technical Notes

Looking at the daily chart for the December Dollar Index, we notice the rally ran into some overhead resistance once prices moved above 80.00. The 14-day RSI has moved into overbought territory, with a current reading of 70.26. There is also a bit of a bearish divergence beginning to form in the RSI, and coupled with the markets failure above 80.000, we may be overdue for a correction in prices. Resistance is seen at Tuesday's high of 80.430, with support seen at 77.835.

Mike Zarembski, Senior Commodity Analyst