With multiple reports of USD shortages including the need for an emergency Fed swap line in September why is it not showing in the DXY? Is the DXY to the USD what the paper market is to the precious metals?

Put yourself back in September 2008. Fannie Mae was bailed out on September 8 followed by Lehman, AIG, etc through September 22. Over that period the DXY falls 5.6%. Think traders were scratching their heads wondering why the USD was so weak? Where’s the fear? Is the USD as a safe haven trade dead?

Fast forward to 2011 and the USD shortage is alive and well yet over a similar period the USD has fallen 5%. I mean what are we missing here? What does the chart say you may ask. Have a look.

Notice the multi year parallel channel the DXY is trading in and failed breakout over the summer.

Notice the price action around key bank failures.

Notice the channel it broke out of prior to moving higher.

Notice the current price action and that labeled PT A. A test of the bottom before moving higher.

Perhaps the USD is dead as a reserve currency. Perhaps QE will prove it is in fact different this time. I find the chart a little too similar to simply dismiss though.

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2011 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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