Wednesday, July 15, 2009

Dollar Index: At Risk To Unravel

The Dollar Index (symbol: $DXY) is trading significantly lower this morning, and it is at risk of closing the week below three pivot points as seen on the weekly chart in figure 1.

Figure 1. Dollar Index/ weekly

I discussed the significance of this pattern in the June 19 article, "Very Dangerous Time For Dollar Index". Essentially, this is a very ominous price pattern that portends a high likelihood of a major down draft for the Dollar Index. A weekly close below the third pivot point at 79.46 would make this pattern valid.

If the Dollar Index were to be set on a downward spiral, I think the biggest beneficiaries would be long term Treasury yields and gold. I have been "pounding the table" for higher Treasury yields for months, and this might be another tailwind that sets that ship in motion. Gold has been on the launching pad for a significant and sustainable move in either direction for months, and the Dollar's downdraft might be the thrust to launch gold higher.

Figure 2 shows a concept that I have put forward before, and it is gold's performance relative to a basket of 8 currencies.Those currencies are: 1) Australian Dollar; 2) Canadian Dollar; 3) Swiss Franc; 4) Eurodollar; 5) British Pound; 6) Singaporean Dollar; 7) Japanese Yen; 8) US Dollar. This is a weekly chart. (As an aside, this chart looks different than previous charts I have shown as I now have the calculations correct.) Relative to other currencies gold has yet to break out, but I still like the position that gold is in. The indicator is making higher lows, and a breakout will carry prices a long way.

Figure 2. Gold v. Currencies/ weekly

As far as equities are concerned, a lower Dollar will float all boats. Just look at today's price action. All assets -except bonds - are higher. However, it is all relative as higher equity prices in the face of a lower Dollar doesn't really get you anywhere. No country has ever devalued its way to prosperity. Commodity based economies (i.e., Canada, Brazil, South Africa, and Australia) should outperform non-commodity dependent economies. Furthermore, a lower Dollar will keep the inflation debate -real or perceived - on the front burner, and this will be a definite headwind for equities. In sum, a lower Dollar should benefit Treasury yields and commodities more than equities.


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Anonymous said...

Hello Guy M. Lerner
I was reading about your market timing signal. Where is it posted?

jbr said...

Seems like the dollar made a run towards the end today to save the pivot... atleast for this week. :)

By the way, how do you define the close for a currency given that it trades 24hrs?

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