Tuesday, November 1, 2011
The US Dollar is now left as the lone "safe haven" currency due to the currency intervention from the Swiss and Japanese. This does not necessarily mean that the greenback is slated to move higher, as rising equity and commodity prices could trigger more risk taking from forex traders. However, if traders go on the defensive, the Dollar could potentially benefit more than any other currency. Technically, the reversal pattern suggests that the greenback could find near-term strength. If prices are to mount a sustained rally, the market needs to take out recent highs near the 80.00 level. Some traders may want to bide their time and wait for the December Dollar Index to close above 80.00 before entering into a futures position. Some traders who are convinced that the recent reversal will spill over into a sustained rally may perhaps wish to consider entering into a bull call spread, for example, buying the December Dollar Index 78 calls and selling the December 80 calls for a debit of 0.45, or $450. The trade risks the initial cost and has a maximum profit potential of $1,550 if the December futures contract closes above 80.00 at expiration.
The Bank of Japan currency intervention caused the Yen to tumble sharply, and in turn, the US Dollar was bolstered. Many traders have been using three currencies as safe havens - the Swiss Franc, the Japanese Yen and the US Dollar. The central banks of Switzerland and Japan have now intervened to slow the appreciation of their respective currencies' exchange rates. It looks as though the greenback will once again be the benefactor of other currencies weakening, either by their own choice or market forces, instead of strengthening on its own merits. The Dollar is still plagued with its own issues, including slow economic growth and federal government budget imbalances. The Dollar will likely find strength when traders are in a defensive mode, avoiding risky assets. If both equity and commodity prices are able catch a sustained bid, the greenback may not be able to find sustained traction, even with the outside currency intervention.
Turning to the chart, we see the December Dollar Index trading down to 75.00 before rebounding. The market avoided a test of the 74.00 support level, but did break the 20, 50 and 100-day moving averages on the downside before climbing back above the 100-day yesterday. The market has crossed through the 20 and 50-day averages in early trading. This could negate the negative impact of the downward crossover of these two averages. The next upside resistance level comes in at 78.00, and if this level is broken, the chart would suggest that the relative highs near 80.00 could be tested. It is interesting to note that the momentum indicator has severely lagged behind both price and RSI at this point, hinting that the sharp reversal could be an aberration.
Rob Kurzatkowski, Senior Commodity Analyst