We wrote articles recently that said that the dollar bearish fundamentals had peaked and put forward solid reasons why the dollar would rally and it has done just that – but will the rally run out of steam? Lets take a look.
When we wrote our last article the story which amused us was Gisele Bundchen (the Brazilian supermodel) wants to be paid in any other currency except US Dollars and this bit of news warranted a front page headline on many news sites and encouraged us to postulate the fundamentals had peaked and bearish sentiment had pushed the dollar too far.
Another story which newswires continue to go on about as a bearish dollar fundamental is, crude oil.
Many still think it trade above $100.00 and could go as high as $150.00 and strangle the life out the US economy – Rubbish, there is no shortage of crude and demand is falling globally.
As we said at in our last article:
“Global demand for crude is falling not rising and this bubble will burst and we see crude returning to the $80.00 a barrel level shortly”.
It’s trading at around $85.00 level at present.
The problem with any market is when it becomes to bearish investor psychology takes hold and pushes prices too far.
The simple fact is that prices get pushed to far when any snippet of news regardless of how ridiculous is used by traders to justify the fall and the two above are perfect examples.
The Canadian dollar for example, was a major winner from dollar weakness but has plunged 10% from its highs. Many traders think that the US Dollar will not maintain its rally against the euro but the chances are it will.1.50 is the high and represented a peaking of extreme bearish fundamentals, the currency surged to the 1.50 level, and then finished the day near its lows a classic sign of a top and exhaustion of a trend.
The euro may have a bit more on the upside from current levels – but it has no chance of the currency sustaining the 1.50 level, just as crude has no chance of trading at $100.00 for to long – without geo political instability.
The dollar bearish fundamentals have peaked for the following reasons:
– The credit crisis is factored into the currency.
– Interest rates will not fall by 1%, with 0.5% at best again discounted.
– GDP is robust and will help the US economy steer clear of recession and this growth will eventually
pick up investor confidence.
– Jobs data is improving and will get better as GDP picks up.
– Oil prices are falling and are unlikely to trade above or near $100 again.
– Investors have confidence in the FED and US policy.
The US Dollar is not out of the woods just yet but the bearish fundamentals have certainly peaked.
Next Week View
10 / 12 / 2007
Euro – We would be looking for the bounce to end and think 1.48 is the most traders can hope for on the upside. We think the euro will trade to 1.44 this year and below 1.40 for 2008.
Yen – Is the only major currency that could strengthen against the dollar. At present we are trading near 112.00 resistance with firmer resistance at 114.00. We would expect at least a good dip back from the 112 region as the dollar looks over bought on a short term basis.
When Will The Bears Take Control
A stochastic crossover with bearish divergence could be used to spot weakness in both of the above.
There are many dollar bears around but the background is turning bullish and the dollar could see broad based strength against a lot of currencies in 2008 with the exception of the yen.
Good luck and good trading!