Dollar Bullish amid Trader Confusion

By: Brewer Futures Group | Mon, Jun 15, 2009
Print Email

The U.S. Dollar finished Friday's trading session higher in lack-luster trading. Last week several Forex markets posted closing price reversals. The GBP USD and EUR USD posted closing price reversal tops while the USD CAD and USD CHF formed closing price reversal bottoms.

All of these patterns followed through to confirm the reversals but did not have the accelerations like the patterns suggested. On the other hand, this pattern usually indicates a 2 - 3 week counter-trend trade so there is still time to make full corrections. Another sign that the correction will follow-through to completion is the fact that none of the closing price reversal tops or bottoms were negated.

There are several issues causing confusion among traders at this time. The main issues dictating the direction of the Dollar are interest rates and inflation. This week's auction drew higher yields which put down side pressure on the U.S. Dollar. Traders were driving the yields up because of the huge amount of Treasury supply hitting the market and over concerns the U.S. would not be able to finance its growing deficit.

Here is where the confusion comes in. At one time during the week, the Dollar actually rose on rumors the Fed would raise rates by the end of September. The thinking at that time was that higher yields would attract foreign buying. So what we saw this week was the Dollar falling because of higher yields and the Dollar rallying because of the threat of higher interest rates. This clearly indicates that investors are not certain which condition they prefer.

An announcement by Russia that it would cut its holdings of U.S. Treasury instruments triggered a flight-to-safety rally in the Dollar. This in a way was related to interest rates because less demand from Russia along with more supply from the Treasury would spike interest rates. By the end of the week, this event was hardly mentioned in the news. Based on the strength in the Dollar on Friday, however, it is possible that traders could be making an adjustment to reflect this action taking place in the future.

Higher crude oil prices had traders talking about inflation again. This news combined with additional debt issued by the Treasury raised trader confidence that inflation would surely show up at some time in the future. The gold market on the other hand did not reflect this scenario occurring at all. If selling pressure continues in the gold market next week, the U.S. Dollar is likely to surge. Depending on what the crude oil market does, the Dollar could have a spectacular week.

Euro and Canadian Dollar traders are facing other issues besides U.S. interest rates and inflation. The concern for investors regarding these two markets has to do with their rapid rise and its effect on exports. Both German and Canadian economies rely heavily on exporting goods and services to other countries.

Although it has not been specifically addressed by the European Central Bank and only in a statement by the Bank of Canada, the strong rise in these two markets could choke off demand for exports.

The strength in the USD CAD the past two days could be reflecting the fact that this may become an issue over the next few months if the Canadian Dollar is allowed to rally. A breakout to the upside through 1.1290 will change the Main Trend to up and would indicate the strong possibility of a rally to 1.1922.

The Euro Zone economy is in the same position as Canada. A break could be coming in the Euro because of the treat that a high price Euro could damage exports at a time when the economy needs growth to get out of the recession.

In summary, both technical and fundamental factors are indicating the Dollar could rally next week. Last week's closing price reversals and subsequent confirmations are indicating that the Dollar has room to rally. Weakness in the gold market and the lack of inflation should also help the Dollar. In addition, the highly priced Euro and Canadian Dollar could feel pressure if traders decide these two prices are trading at levels which could hurt German and Canadian exports. If these markets do not break on their own then look for the central banks attempt to talk these two markets lower.

 


 

Brewer Futures Group

Author: Brewer Futures Group

www.BrewerFuturesGroup.com
Info@BrewerFuturesGroup.com

Contact us at:
Local: 312-896-3930
Toll Free: 1-800-971-2440

DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as "spread" or "straddle" trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

Information provided in this correspondence is intended solely for informational purposes and is obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.

Copyright © 2009-2010 Brewer Futures Group

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com