Earlier this morning, we discussed the concept of oversold, specifically looking at bonds. Let’s now review the same concept, as applied to currency — specifically, the U.S. greenback, via this chart from Mike Panzner

With sentiment towards the dollar almost universally bearish, is it any wonder that the market appears to be setting up for a major rally in the greenback?  Some fundamental factors that might be behind the move:

– the prospect that U.S. interest rates are poised to rise (further), rather than decrease as some had been expecting up until only recently

– "safe haven" buying of the greenback on the view that market conditions (e.g., volatility) and geopolitical developments are becoming increasingly unsettled

– profit-taking by U.S. investors in foreign securities, who’ve garnered substantial gains in recent months, with the procedes being repatriated to the U.S.

– indications sizeable short positions in the U.S. dollar

– chart-related buying

What does this mean? Well, let’s have a look at a chart:

Dollarbreakout

Nice work Mike — thanks!

Category: Currency, Markets, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

23 Responses to “Dollar Breakout?”

  1. Fred says:

    Why cant it just trade sideways Barry? I see some resistance in the high 83′s to low 84′s (prior bottoms). 80 – 85 is my trading range guestimates…I think it would be helpfull to look at a much longer term chart…say back to the early/mid 90′s.

  2. Ssembonge says:

    Not with the fed printing money and the ever increasing money supply.

    I don’t know anything about money but until the fed mops up the liquidity there will be no break-out. Dead cat bounce, may be. I see the US dollar dancing at the edge of a cliff.

  3. David says:

    Longer-term charts only underscore the fact that the greenback is at historic support, testing the lows of late 1990, the fall of 1992 and the spring of 1995–as well as the lows of late 2004.

  4. donna says:

    Helicopter Ben ain’t gonna stop doling out the dollars anytime soon.

  5. Estragon says:

    This chart also masks the bifurcated nature of the USD relative to trading partners.

    The USD is largely fixed against many (China, gulf oil states, etc.), so the move is outsized against floating XRs. USD/CAD, for example, is near lows not seen since the 1970′s. Canada, by the way, is still the number one export market for the US.

  6. anderl says:

    Has anyone considers that the dollars current value is trading at an indexed rate of 80 to 90? that any deviation outside of that range was the result of foreign influence int eh currency market (asians) back int he late 80s and an adjustment had to happen to bring things back into the normal range.

    But by all means please go out and get a forex account and sell dollars. Short the dollar on the various ETFs that allow you to do so. Please sell all the positions in your portfolio and sell dollars. Then come back in 1-2 years.

    Conviction of your opinion on the matter is not what you are willing to post on a message board but what you are willing to risk holding that conviction.

  7. Alex Khenkin says:

    For all the “Helicopter Ben” comments here one might imagine that other central banks are one collective model of restraint. All this negativity about the US$ makes me think there’s plenty of upside in store for the greenback relative to other paper currencies.

  8. Alex Khenkin says:

    “Conviction of your opinion on the matter is not what you are willing to post on a message board but what you are willing to risk holding that conviction.”
    Couldn’t agree more. Opinions are like noses, everyone has one and feels attached to it. Those actually backed by one’s own capital at risk – deserve a consideration.
    Small Investor Chronicles™

  9. Estragon says:

    Anderl & Alex

    On the off chance your comments are directed to me, I should point out that my comment is medium-term USD bullish.

    The countries (eg. Canada) with high USD XR’s are likely to start showing signs of stress in export industries. Canada in particular has roughly twice the trade intensity of the US, and stress in export industries will eventually lead to a slowdown and cuts in short rates. That leaves US short rates and the USD comparatively more attractive.

    In the longer term I’m USD bearish, but short/medium term, I’m more bullish. I currently have a significant CAD long, but will trim as/if oil and commodity prices start to sag and/or signs of stress in other export industries becomes more pronounced.

  10. DavidB says:

    I’m wondering if the dollar is beginning to forecast the end of GWBs reign and possibly the eventual pulling out of Iraq. Not only that but if higher interest rates are going to be the norm going forward that has to be attractive to investors and pension funds worldwide

    Estragon

    Canada has a huge budget surplus and should see more tax cuts going forward which will only help the consumer more. The strong housing markets are also causing interest rates to continue to rise putting a bid under the dollar. Until inflation shows signs it is under control Canada should continue to do well.

    The US/CAD exchange rate is as much about Canada’s fiscal strength as it is US fiscal weakness. Two forces pulling on different sides of the border towards the same end

    If Ron Paul can pull off a miracle then maybe things will change. Otherwise I don’t see much catalyst for it

  11. 8 says:

    Many people look at the U.S. dollar in a bubble. If you’re comparing it to gold, fine, but compared to other central banks the U.S. does a pretty good job. The Deutsche Bundesbank, I mean ECB, might be better. But it’s not impossible to have inflation soaring and the dollar rallying against most major currencies.

    DavidB, I’m sure people realize that President Hillary will have Robert Rubin in charge, and the strong dollar will return. I think some of the dollar weakness is politically connected, just like all the glowing stories on Airbus and how American business was being surpassed that I read a few years ago. Reality sets in fast.

  12. Eclectic says:

    You’ll have to pardon me, Barringo, but I’m havin’ too damn much fun!!

    http://finance.yahoo.com/q?s=%5ETNX

    You remember the Seinfeld where Kramer took the car salesman on a tank of gas fumes… seemingly endlessly and destined by fate alone into the Twilight Zone… looking for Valhalla, or should I say… Nirvana?

    Oh, the decimals, Barringo… the DeCimALs I say!!… the huManIty!!

  13. Eclectic says:

    Make that:

    “You remember the Seinfeld where Kramer took the car salesman [along for an extended road test with a car on a tank of gas with little more than fumes...]

  14. Jay Walker says:

    The Confused Capitalist is going to weigh in here, and say that while I have no idea about the short-term greenback trading pattern, the longer-term decline of the greenback is a trend that won’t soon be broken.

    Too many fundamental issues left undealt with for too long – kind of reminds me of Canada, circa 1987 – everything looked not too bad – provided you didn’t scratch the surface, or think too deeply about some of the problems. A decade and a half later, the currency finally reversed its trend.

    Unfortunately, I think the greenback is in for the same sort of punishment …

    Jay Walker

    http://confusedcapitalist.blogspot.com/

  15. rebound says:

    “Not with the fed printing money and the ever increasing money supply.”

    … Unless the other central banks print money at a faster rate than the Fed, and we start to look good in comparison.

    … Unless now is a good time to buy low because of all of the storm clouds.

    … Unless China’s lax accounting causes a real mess some day and money pours back into safe harbor.

    … Unless the cheaper dollar allows our manufacturing sector to bounce back a bit and our economy begins to roar.

    I haven’t a clue as to which way the dollar is headed, but I think there are a ton of variables in addition to trading ranges and domestic monetary policy.

  16. lewis says:

    Wow, Barry and Helicopter Ben are looking awful similar nowadays. We’ll know if we ever catch him together in a phone booth changing……

    THE FED
    Bernanke calls for study of effect of home price drop on spending

    By Greg Robb, MarketWatch
    Last Update: 8:29 AM ET Jun 15, 2007

    WASHINGTON (MarketWatch) – The effect of changes in home values on consumer spending remains an open question and would be a fruitful field for academic research, said Fed chief Ben Bernanke on Friday.
    While there is some research that suggests that a drop in home values may effect spending by more than conventional wisdom, there is no conclusive evidence one way or the other, Bernanke said in a speech prepared for delivery to a conference on banking and economics sponsored by the Federal Reserve Bank of Atlanta.
    “I do not think we know at this point whether, in the case of households, these effects are quantitatively significant in the aggregate,” Bernanke said. “Certainly, these issues seem worthy of further study,” he said.

    Mew Mew Mew said the catty economist.

    Oh, the dollar…perpetual downward slide, with upticks based on interest rate increases or the prospect thereof.

    Lewis

  17. lewis says:

    Wow, Barry and Helicopter Ben are looking awful similar nowadays. We’ll know if we ever catch him together in a phone booth changing……

    THE FED
    Bernanke calls for study of effect of home price drop on spending

    By Greg Robb, MarketWatch
    Last Update: 8:29 AM ET Jun 15, 2007

    WASHINGTON (MarketWatch) – The effect of changes in home values on consumer spending remains an open question and would be a fruitful field for academic research, said Fed chief Ben Bernanke on Friday.
    While there is some research that suggests that a drop in home values may effect spending by more than conventional wisdom, there is no conclusive evidence one way or the other, Bernanke said in a speech prepared for delivery to a conference on banking and economics sponsored by the Federal Reserve Bank of Atlanta.
    “I do not think we know at this point whether, in the case of households, these effects are quantitatively significant in the aggregate,” Bernanke said. “Certainly, these issues seem worthy of further study,” he said.

    Mew Mew Mew said the catty economist.

    Oh, the dollar…perpetual downward slide, with upticks based on interest rate increases or the prospect thereof.

    Lewis

  18. Estragon says:

    DavidB – “Canada has a huge budget surplus …”

    Canada’s budget surplus runs a little under 1% of GDP. That’s better than a sharp stick in the eye, but hardly “huge” when considering the business cycle.

  19. Steve G says:

    If we exclude the major USD rally from the late 1990s to the early 2000s, the USD has largely traded between the low 80s- to the low to mid 90s on the dollar index over the last 20 years. I believe the USD rally in the late 1990s occurred because it was the only major safe-haven currency, the Euro was an experiment, investors were wary of Euro currencies in the years before and the Euro immediately after its origin. The JPY weakened from very strong levels as deflation took hold of Japan, the Asian currency crises hit in the late 1990s, and commodities and energy were in the doldrums until the early part of this decade. – Hence the Dollar benefited from an array of circumstances that exagerrated its strength. A move much below 80, no matter how much people seem to argue that is inevitable, always was and will continue to be a low probability. Whilst a bounce from the low 80 to the low 90 zone, would not be out of keeping with past behaviour.

  20. Tyler says:

    Steve G is right…the dollar’s long term range, with the exception of the late 1970s/early 1980s and late 1990s is a slightly downward sloping tranding range in the low 80s to mid 90s. The moderate downward slope is to be expected given that other countries’ economies have been gradually improving relative to the US over the long term, which should also not be suprising given the gradual opening of the global economy from WWII to today. The two periods of strong relative dollar strength coincided with two periods of very high real ST interest rates. Given the historical pattern, we should probably expect the dollar to bounce sideways between 80 and 90 or so for the next 5-6 years. Not very exciting, but more likely than the “helicopter ben” doomsday scenarios bandied about the internet these days.

  21. Sal C. says:

    The ‘dollar breakout’ may be a bit premature. Come on Barry, you know better than that.

    http://jessel.100megsfree3.com/DX.png

  22. Hence, the question mark !

  23. I am checking this Dollar Index chart every week. I believe dollar will go bullish for some time, but *NOT* before it go down to the wedge at least one more time.