Friday, November 04, 2011

US Dollar Should Continue to Fall


The Dow Jones Index saw its largest single week loss since early 2009. This comes as it sold off sharply as the S&P 500 finished its biggest monthly advance in nearly 25 years. Traders aggressively sold US Dollar long positions against the Euro and other major counterparts. This move comes following the announcement of aggressive new aid for Greece and other troubled Euro Zone governments. Overall trends favor further USD declines. Still, it will be critical to watch major economic news this week and next.

The US Dollar continues to track movements in the Dow Jones with stunning accuracy, and we expect the Dollar to respond to major shifts in broader market sentiment. With a US Fed interest rate decision and a US Nonfarm Payrolls coming up today, volatility is guaranteed. We should expect strong US data to drive stocks higher but the US currency could actually decline.

Forecasts call for unchanged interest rates from the US Fed and a fairly tepid gain in October US Nonfarm Payrolls data. These weak and gloomy economic forecasts make it surprising to see such large advances in the US S&P 500. Right now, we believe that recent rallies in the Dow and simultaneous US Dollar tumbles are short-covering. What does this mean? Traders are covering previous DJIA short positions and closing US Dollar long positions. This is forcing stocks higher and the safe-haven Buck lower.

We only need to look at the recent rate of change in the equity markets for evidence of short covering. In normal bull market conditions, price will tend to trend higher while downside corrections are swift and sharp. Fear is a stronger emotion than greed. Price tends to fall much more rapidly than it rallies as traders are running for the exits in a panic. Yet we have most recently seen the opposite. Extreme rallies emphasize that market conditions are far from normal and traders holding short positions are liquidating in a hurry.

We look to the coming days with great interest.

This is because the first week of the month often sets the pace for the remainder of the trading period. It will be critical to watch whether the S&P 500 can post further explosive gains and continue its uptrend through the month of November.

We wait with much anticipation the first trading week for November. Recent trends suggest the Dollar may continue lower this month. However, key event risk could just as easily drive major price shifts the other way causing a major shift in direction.

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