Key Currency Decision Coming

Currencies are going to make a key decision over the next few days, as the Dollar is now at trendline support. This should have a big impact on Commodities and Commodity-based economies, as it will determine the next leg of the Dollar Carry Trade.

The US Dollar is at key support


The British Pound is at key resistance


UDN is the ETF that moves inverse to the US Dollar. It is effectively a weighted basket of several foreign currencies.

Here is a chart comparing UDN to China (FXI). China peaked in November on the Dubai default scare. The US Dollar bottomed a few days later as money looked to the Dollar for safety. The Dollar sold off and then rallied again in January/February on the Greece scare.

The Dollar has had a mild pullback, as stocks have gone higher over the past month. Now you have FXI and UDN testing the tops of their trends. A decision is near for the next leg up or down for Stocks, Commodities and Currencies.


Here is the ETF for Australia (EWA). You can see that price is little changed since October. But look at the trading pattern – a series of higher highs and lower lows. William O’Neil calls this “wide and loose”, others call it a Reverse Symmetrical Triangle. What it is is a lot of institutional indecision.

This pattern is the lowest common denominator entry point for trend reversals. EWA still has to hit a new high to set up the pattern, and then a sell has to trigger. The pattern may fail and EWA may break out from here, but the setup will be worthy of your attention if you own commodities or stocks.


That is the whole point of this blog. You can’t tell the future, but you can be ready in advance if the setups are there. You have to be! I actually hired a second consultant to help me simplify my money management. His job is to help me distill the market down to key leadership and see stuff like this as it is setting up.

I can’t keep track of 800 companies, but I can observe whether Large is outperforming Small or Domestic is outperforming International. And I can keep track of something as simple as this chart, because #4 was a key buy level and #3 was key short. I don’t need too many of those trades to make my year or miss too many blow my year.

You will see a different tone to this blog. It will be very mechanical – much more simplified. I will do a lot less trading in 2010. I will be waiting for setups like EWA or UDN/UUP and when they trigger, I will commit money with stop losses, in case the market tells me that I am wrong. A chart like EWA gives me a very clear idea of when I should be committing new capital and taking profits.

Here is a chart comparing UDN to Gold (GLD). You can see that Gold is the anti-Dollar. So a breakout in UDN will probably be good for Gold and a breakdown in UDN will probably be bad for Gold. We’ll see how it plays out. I would probably be focusing on GLD on a break above 112.5 if UND can break out. However, if UDN has another leg down, then I will be holding off on new Gold purchases.


The next crisis may be forming. It is a potential trade war with China over the valuation of their currency. Paul Krugman dropped a bombshell on Sunday when he wrote things like the following in the NY Times –

http://www.nytimes.com/2010/03/15/opinion/15krugman.html

“China’s policy of keeping its currency, the Renminbi, undervalued has become a significant drag on global economic recovery. Something must be done.”

“Most of the world’s large economies are stuck in a liquidity trap — deeply depressed, but unable to generate a recovery by cutting interest rates because the relevant rates are already near zero. China, by engineering an unwarranted trade surplus, is in effect imposing an anti-stimulus on these economies, which they can’t offset.”

“It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.”

“The Peterson Institute for International Economics estimates that the Renminbi is undervalued by between 20 and 40 percent.”

“In 1971 the United States dealt with a similar but much less severe problem of foreign undervaluation by imposing a temporary 10 percent surcharge on imports, which was removed a few months later after Germany, Japan and other nations raised the dollar value of their currencies. At this point, it’s hard to see China changing its policies unless faced with the threat of similar action — except that this time the surcharge would have to be much larger, say 25 percent.

I don’t propose this turn to policy hardball lightly. But Chinese currency policy is adding materially to the world’s economic problems at a time when those problems are already very severe. It’s time to take a stand. “

Now you can agree or disagree with Krugman’s logic. That is not the point. The point is that you are now getting key economic figures talking about a trade war with China, where the purpose of the war is to massively devalue the purchasing power of the US Dollar.

I know that the long run path of the US Dollar is lower, because it is the only way to get jobs back home and inflate our debt away. That said, my brother once told me that “markets go to the most logical place, in the most painful manner possible”. So keep an eye on UDN and commodities and stuff like EWA, because a big decision is coming very soon – one way or the other.