We are waiting and watching this one, we think it could be the trade of the next quarter. Waiting for Mr Market to confirm to us that others are thinking the same way. Well, we know they are, we are just waiting for their wallets to confirm it.
We concur with this fundamental view of the US Dollar as written so well by Jon Thomas of madhedgefundtrader.com.
No asset class has suffered more from QE2’s massive expansion of the monetary base than the US dollar. Ben Bernanke’s decision to freeze the Federal funds rate at near zero, while the rest of the world has ratcheted up rates, has proved a death knell for the greenback. It would be a vast understatement to say that this has become a one sided trade, with positions in the futures markets betting against Uncle Buck at record highs. This has become every trader’s free lunch.
We all know how this story ends. When too many traders pile into one end of the boat, it capsizes. Think of stretching a rubber band to its limit and waiting for the snap back. The next chapter in this story has to read that the rest of the world pauses with their rate rises, while the US plays catch up, possibly later in the year. The first round of profit taking in the “RISK ON” assets of stocks, commodities, oil, precious metals, and foreign currencies is certain to trigger a flight to safety bid for the dollar. Then those huge, hot speculative positions in the dollar come tumbling down.
Most over extended on the upside has been the Euro, which seems to want to go higher as its fundamentals worsen. The move from $1.28 to $1.46 has been accomplished with a mere 0.25% rise in interest rates, and some impressive jaw boning by European Central Bank president Jean-Claude Trichet. Never mind that the PIIGS are at or near bankruptcy, most European banks have a negative net worth when their cross holdings of sovereign debt are marked to market, and that Europe’s economy is growing at half America’s rate, and a tenth of China’s.
COMMENTS: We like to check our cycle work for confirmation of the fundamentals, it is always mysterious coincidence when the cycles time well with the fundamentals.
We have posts on the US Dollar that require your review before you consider any US Dollar bullish investment.
Euro approaching another cycle top
Who do you think you are kidding Euro!
US Dollar currency, short term bullish, long term bearish not so sure
The US Dollar has a 60 week cycle that has yet to show up, it may be late, but it is there, and it could be a beast. All it would take for US dollar to break higher is a mere hint that the Fed may raise rates a tiny 0.25% or something similar. The political pressure to get oil and other commodities down just may be played out in May 2011. After all the USA Fed is not immune to politics.
Of course do not do anything until Mr Market rolls over from bearish to bullish.
UPDATE 20110429: Some large bets are flowing into the UUP in the last two days. Just like prior to previous UUP up turns. Watch for more volume spikes. US Dollar has had an emotional sell off (spring), it wont crash, a bullish rebound is coming as every one positions for QE2 ending.
Latest UUP Etf cycle chart..
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.."Tape reading is rapid-fire horse sense...The Tape Reader aims to make deductions from each succeeding transaction -- every shift of the market kaleidoscope; to grasp a new situation, force it lightning-like through the weighing machine of the brain and to reach a decision which will be acted upon with coolness and precision"..
Richard D Wyckoff
.."If past history was all there was to the game, the richest people would be librarians"..
.."The key to making money in stocks is not to get scared out of them"
In the short run, the market is a voting machine, but in the long run it is a weighing machine.
.."Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected"..