US Dollar Rally to Terminate Under Weight of Inflation

By: David_Petch

Old man winter definitely arrived last night (for the second time this year, dumping around 6 inches of snow on the Peg. Each snowflake by itself is nothing in weight, but collectively represent a significant amount of weight that can pack down and form glaciers that may not move mountains, but definitely carve a path. Think of each USD as a snowflake, which by itself is nothing. Collectively though, the trillions of USD similar to the snowflakes blanketing a city are instead blanketing the globe. This creates a real slippery situation that causes accidents left and right, even for those that are conservative drivers. Snowploughs (AKA Central Bankers) can clean up and move the snow, but it merely is removed. Allow for a strong wind and the snowflakes are blown all over the place, creating huge drifts in areas where there once was nothing.

The current global economy fits the above situation to a tee, because as long as the season of inflation remains, the USD and other global currencies will be blowing around the globe whichever way the wind blows, creating financial drifts that will vary in size and severity. The only way to clean up this mess is for a change in seasons, which implies a warming to melt the fiat currencies of the globe so that spring can arise once again. Before this can happen, the season of winter must first runs its course. The season of inflation is just getting started, so snuggle up and keep warm because those financial winds are likely to send chills up the spine.

Lower Bollinger bands are starting to rise to meet the upper BB's that all curled down, confirming the bottom from a few weeks ago. Fibonacci time extensions of various waves are shown near the lower portion of the chart, with a cluster of dates occurring in early January. Short-term stochastics have the %K beneath the %D within the confines of a rising stochastic wedge; as long as the %K remains within the confines of the stochastic triangle, the trend is up. Although the USD was extremely overbought, the present wedge has been forming for nearly two months. Expect another 5-6 days of a topping process in the dollar before a top is put in place.

Figure 1

Red lines on the right hand side represent Fibonacci price projections of downward trending wave price action projected off subsequent corrective termination points. Blue lines on the right hand side represent Fibonacci price retracements of the move from August 2007 until mid December 2007. Areas of line overlap form Fib clusters, which indicate important support/resistance levels. I did not add a Babson channel today, but the 61.8% channel retracement level was taken out in October, leading to the subsequent sell-off. There is strong resistance around 76.6, which if broken could see the dollar attempt a rally to 80. Full stochastics have the %K above the %D after breaking out of a six month stochastic triangle. The move at present could see the USD continue an upward trend for another 4-6 weeks before topping out. The short-term trend appears to be setting up for a top, but the longer-term trend suggests this is likely a pause in a longer-term upward move/consolidation.

Figure 2

The weekly chart of the USD Index is shown below, with the lower Bollinger bands drifting beneath the index suggesting a bottom of some form is trying to be put in place. The downtrend line in place since 2002 has proven to be formidable resistance, with any potential upside likely to be capped at 80. Should the index manage to break the downtrend line, it will indicate a change in the trend. Fibonacci price projections of the decline from 2002 until early 2005 projected off the termination point in April 2006 are shown on the right hand side (denoted in red). The Fib level at 74.7 held, with the potential for another 4-6 weeks of upside before a top is put in place. Full stochastics have the %K beneath the %D for 20 months, but if one notices earlier data, a negative or positive divergence may take anywhere from 18-24 months before a reversal occurs. The charts suggest at least a sideways action in the market between 74.8 and 78-80 over the next 4-6 weeks before a top is put in place.

Figure 3

The long-term Elliott Wave chart of the US Dollar Index is shown below, with the thought path denoted in green. The present dollar decline recently completed wave [W], with the likelihood of 4-6 months of sideways action before continuing its descent. There is the chance probability that the USD simply keeps on declining, but many countries are lowering their interest rates in an attempt to keep their currencies weak too.

Figure 4

The Euro/USD chart is shown below. The Euro appears to be completing a corrective move up during the past week, with the latter portion resembling a terminal impulse. A breakdown in the Euro would aid in powering the USD higher.

Figure 5

The USD/Yen is shown below, with the potential for upside based upon the depth of the RSI. The USD is likely to strengthen relative to the Yen over the course of the next 2-4 weeks, but remember the unwritten law that China has with Japan will cap the move (China never wants to see the USD/Yen ratio rise above 122.

Figure 6

The USD/Canadian Dollar (Loonie) is shown below, with what appears to be consolidation pattern around the parity level. The RSI is forming a triangle, so a move in the above index below 1.0075 would see further downside.

Figure 7

The Canadian dollar Index is shown below, albeit not as clear as I hoped for. The upper Bollinger bands require another 2-4 weeks of downside before the next upward move in the Loonie can occur. Full stochastics have the %K beneath the %D with the same matching time required for a crossover to occur. My bank will not allow me to transfer my loan from CAD to USD, so I guess I have to change banks. The CAD is going to go to around $1.40/USD by mid 2009 so anyone who has the opportunity to perform the transaction of taking a loan in USD and paying it in CAD could do well.

Figure 8

The put/call ratio chart is shown below, with the %K beneath the %D. A crossover of the %K above the %D will indicate a top in the S&P is in place. Should the %K cross above the %D and fall beneath again, it would represent a continuation pattern. At present, it appears that 2-4 weeks remain before a top is put in place. One further confirmation for a top should see the put call ratio fall to 0.6 or lower, creating a move that extends outside the Bollinger bands.

Figure 9

By David Petch

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