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Time To Sell The Dollar Capitulation

Tyler Durden's picture




 

Submitted By Nic Lenoir of ICAP

Two key charts this morning for EURUSD: weekly and daily. The weekly chart shows how the market is testing as resistance the old support line of the bullish channel, and last time it attempted to reintegrate the channel last December it rejected it strongly on the close. On the daily chart, we see that the slow stochastic is basically at the same level that corresponds to all the previous significant highs, and we have run all the stops over the past few days after we broke out of the ending diagonal which sets up for a perfect capitulation.

On a fundamental level, last time EURUSD was at 1.50 the rest of the world was growing a lot faster compared to the US than it is now, oil was above $100 as part of a bubble that was about to burst, and global aggregate demand, mainly represented by the US, was about 15% higher. The only fundamental that supports a weak US dollar is the deficit, but yet again the UK is following the quantitative easing path, Japan and Europe are stimulating their economies at the taxpayer's expense, with Japan having no real lesson to give when it comes to nationalizing private debt and consumption (their main policy in the early 90s), and China is running pretty much on stimulus with debt to GDP ratios hardly available for their economy as they are lost in the statistical smoke and mirror show orchestrated in Beijing and a massive over capacity problem... So we are not exactly alone having problems balancing budget, and exporting countries like Germany, Japan, and China, need the US consumer to make a comeback to sustain their consumption beyond their stimulus plans. That can't happen if the value of the USD prevents Americans to shop abroad. Concerning Europe in particular, the ECB is between a rock and a hard place, with Germany's export driven economy hurting and trying to recover, while Spain or Ireland are still deep in trouble (Spain a potential disaster still not exposed).

The only way the USD will keep falling much further is on an attack on the greenback, which is in nobody's interest, even those who think a global currency is the way of the future (more on that in a later discussion). I would recommend selling EURUSD around here, observing a stop on a daily close above 1.4800.

As always good luck trading,

Nic   

 

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Wed, 09/16/2009 - 09:10 | 70918 Ivanovich
Ivanovich's picture

Ballsy.  You're making the assumption (which could be right) that this is a market that will follow some semblence of logic or TA.  It isn't and it hasn't been.  Getting in front of this train might get you run over, but from a Risk/Reward aspect, it could - could - be a great call.

 

Best of luck.

Wed, 09/16/2009 - 09:31 | 70935 Anonymous
Anonymous's picture

Ballsy indeed, but remember Keynes' Comment: "The market can stay irrational longer than you can stay solvent."

Best of luck.

Wed, 09/16/2009 - 09:16 | 70922 LoneStarHog
LoneStarHog's picture

"...China, need the US consumer to make a comeback to sustain their consumption beyond their stimulus plans...."

Sheesh!  Another in-the-box and clueless dimwit who hasn't a friggin' clue about China.

Good luck, Nic!

Wed, 09/16/2009 - 09:35 | 70938 ratava
ratava's picture

Premature posticulation.

Have a black swan in return.

http://www.youtube.com/watch?v=wepAxJ6BN30

Wed, 09/16/2009 - 09:34 | 70939 ratava
ratava's picture

This guy may have a point, but I agree. All the people who cry "China needs US to keep onsuming their stuff and pay them in rapidly devaluing dollars." are either indoctrinated Americans or indoctrinated BY Americans. Get a clue, China can sell their struff to BRI's, Australia, Arabs, or Europe and they might actually get paid in something else than worthless pieces of paper. Only thing keeping US from rapid bankruptcy is the rest of the world being scared of their military. Wait 10 years when you are no longer able to afford your shiny toys, you will become a laughing stock as you starve.

Wed, 09/16/2009 - 09:53 | 70954 Whizbang
Whizbang's picture

it just happens to be a coincidence then that the vast majority of chinese exports go to america? I hope the arabs like cheaply made particle board furniture.

Wed, 09/16/2009 - 09:58 | 70964 Anonymous
Anonymous's picture

"Become a laughingstock"? Aren't we already the laughingstock of the whole world?

Likely that we won't starve because of our massive (subsidized) agricultural production.

How do you keep the supply chains up and running w/o the imported oil to do so is a relevant question, though, (and also why I have 2 years supply of food on hand along with bullion and guns. Trading is just for fun after my downside is covered.)

Wed, 09/16/2009 - 10:04 | 70974 PD Quig
PD Quig's picture

I don't mean to sound jingoistic, but there was a reason why the banksters let us buy all those shiny toys (the ones that cause things to go "Bang!"): they need the threat of force to keep you silly furriners in line. There shall be NOTHING that is interposed between a bankster and his quarterly bonus, and the sooner you get that through your silly head the sooner you will become a more successful trader and more compliant citizen of the world.

Wed, 09/16/2009 - 09:55 | 70959 gmrpeabody
gmrpeabody's picture

" Another in-the-box and clueless dimwit who hasn't a friggin' clue "

 

Now that's disrespect!  ROTFLMAO

Wed, 09/16/2009 - 09:23 | 70926 Anonymous
Anonymous's picture

perhaps would you be so kind as to enlighten us

Wed, 09/16/2009 - 09:28 | 70930 aus_punter
aus_punter's picture

i would rather see the euro begin to roll over or the DXY pointing upward for more than 5 minutes before attempting to call the turn in the dollar......

Wed, 09/16/2009 - 09:57 | 70963 gmrpeabody
gmrpeabody's picture

+1

Wed, 09/16/2009 - 09:28 | 70931 Anonymous
Anonymous's picture

Nice post. I am of a similar pursuation. The debate is about whether there will be a run on the dollar. Or put it another way, has Mr. Bernanke's and Obama's policies made a currency crisis the next event trying to mop up the banking crisis? Just because a dollar crisis is in no one's interest is not enough, IMHO. The FX market is very difficult to manipulate for the central banks. And no one is even mentioning the dollar from the Fed or the Treasury. The signalling is really bad. Yesterday, good reports out of the US bid up the dollar, only to have Bernanke slap it down at 11am. I think the Fed has decided to sacrifice the dollar, albeit gradually. But the market will not give them a choice, in all probabbility. They will keep printing money to buy toxic assets, keep rates at zero indefinitely = Dollar in peril, serious trouble. The dollar blow up will be really bad for everyone, including me. However, one has to be realistic about the options available to the Fed given Obama policies of increasing debt at ever increasing rates. If the 10 Y yields go beyond 4%, dollar is in serious trouble - that is my opinion.

Wed, 09/16/2009 - 10:15 | 70984 Assetman
Assetman's picture

You have several very good points here, anon.

I do agree that a run on the dollar is the central question at this point.  As long at the Fed is in the business of monetizing debt, there is a persistent risk that the DXY will be lower than investors expect.

May we see a USD rally against the Euro for a brief period?  Sure it's possible, and something I wouldn't debate.  But as long as current US Fed policy remains in place, you are swimming upstream in the Snake river with the salmon.

I suspect that we may well see 10 yr Treasury yields spike to near 4% when the Fed finishes up the $300 bil Treasury shell game next month.  If that happens, I do think the dollar remains in check.  But the Treasury has every incentive to keep rates low, as it continues to raise capital at a frightening pace.

I do think the release valve will be the equity markets, starting sometime in October, maybe November.  A decline there will spark another flight to quality migration, and a natural home will be found in the Treasury markets.  This should keep yields and the USD in check for a while.

Given that there is a desire for our government officials to sell those crappy Citigroup holdings at a nice gain now (versus later) may just tell you all you need to know about what's in store over the next several months.  But if we continue the madness and the Fed expands the balance sheet even more, the DXY becomes a clusterf*ck below 71.

Wed, 09/16/2009 - 09:29 | 70932 ratava
ratava's picture

S&P is also at .42 retrace since the March low. Perfect time for a drop.

Wed, 09/16/2009 - 09:30 | 70934 Anonymous
Anonymous's picture

Low US$ = cheap holidays in the US.

Great country if you can survive the staring, shouting, throttling, karate kicks and anal searches of US customs.

For the rest: great!

Wed, 09/16/2009 - 09:38 | 70940 AR
AR's picture

In response to the comment above at 9:16. The current trading environment is difficult to say the least. Most ZH commentators and readers respond in respectful, thoughtful, and in a meaningful manner in a way to "add" to the aforementioned commentary or articles. We understand that blogs get heated and opinionated. Though, before writing, I encourage everyone to "think" before sticking their foot in their mouth with commentary like labeling commentators "dimwits." The Zero Hedge site is high-end, with commentary insightful, educational and thought provoking. Let's keep it that way with equal "high-end, thoughtful" responses. PS: The Euro is indeed topping here in this 148-150 area.  Good luck trading everyone.

Wed, 09/16/2009 - 09:43 | 70942 ratava
ratava's picture

Isn't that like one of the basic internet discussion rules? "First person to use ad hominem attack loses all his credibility."

Wed, 09/16/2009 - 09:46 | 70947 crzyhun
crzyhun's picture

+10.........

Having agreed, I have one more thought. The mysterious support of the dollar will continue like this rally. Back channel discussions are real and 'us'  will never know except by watching the tells and the crumbs through the forest. Good soldiers that we are, we stay alert, adapt and engage.  

Wed, 09/16/2009 - 10:50 | 71032 Gordon_Gekko
Gordon_Gekko's picture

I see no problem in calling a spade a spade.

Wed, 09/16/2009 - 09:51 | 70944 mdtrader
mdtrader's picture

Err tons of dollars being printed compared to euros. Supply and demand. The dollar goes down unless there is a serious shock from euroland, ie the banks implode. Plus funding costs, dollar is the new carry trade.

Wed, 09/16/2009 - 09:53 | 70953 ED
ED's picture

Sell USD! Well, it's a turkey-shoot, aint it!

Aint it?

Wed, 09/16/2009 - 10:11 | 70976 Gordon_Gekko
Gordon_Gekko's picture

What you are forgetting "Nic", is the fact that all the other countries you mentioned are not 70% "consumption based" (a euphemism for "give us real goods and we'll give you toilet paper in exchange for it") economies. The industry in the US has been DECIMATED. None of the other countries are in so much debt to the rest of the world as the US.

"The only way the USD will keep falling much further is on an attack on the greenback, which is in nobody's interest, even those who think a global currency is the way of the future"

Are you f--king kidding me?

Wed, 09/16/2009 - 10:23 | 70996 Anonymous
Anonymous's picture

Not only are they not 70% consumption based, but 50-75%'s of their populations are dirt poor wondering where their next meal is coming from.

Wed, 09/16/2009 - 10:49 | 71029 Gordon_Gekko
Gordon_Gekko's picture

Japan, China and Germany? Really? You mean the creditor countries which are actually producing stuff AND LENDING MONEY TO THE US are bankrupt and not the US? So let me get this straight - and I'm sure it makes sense for America's MSM brainwashed populace - the debtor is richer than the creditor. And to say "50-75% their populations are dirt poor wondering where their next meal is coming from" is and outright FABRICATION, my friend. You are fooling no one.

Wed, 09/16/2009 - 12:41 | 71203 Yossarian
Yossarian's picture

I think trade deficits are less relevant than people think.  When apple produces and Ipod it is imported from China yet 99% of the value-add is ex-China.  Trade statistics don't properly account for this.  Yes Americans have been over-consuming and is now coming to the realization that they are not as wealthy as they thought and so mustn't rely on their assets for retirement rather than saving from current income; but that has nothing to do with the trade deficit.  

Say 20 years from now, after a massive trade war, the US was a 100% contained economy and one day all the steel manufacturers decided to relocate to vacant facilities in China that employ really cheap labor.  So now all steel used in the US is coming from China but the owners of those facilities are making huge profits.  They use those profits to hire all of their former workers to do things like mow their lawns, do their laundry, cook their food, etc.  The former manufacturing economy has now become more of a consumer economy but did anything really change? No, things actually improved as you have the same amount of steel but also hair cutters, landscapers, cooks, etc.  The problem arises if innovation is stifled but such innovation takes place in the mind and is a human capital issue not a physical capital issue.  

Wed, 09/16/2009 - 13:46 | 71299 Anonymous
Anonymous's picture

"The former manufacturing economy has now become more of a consumer economy but did anything really change? No, things actually improved as you have the same amount of steel but also hair cutters, landscapers, cooks, etc."

Actually yes things did change. You took a bunch of middle class workers and made them all low class workers.

Wed, 09/16/2009 - 14:38 | 71366 Yossarian
Yossarian's picture

Actually, in this (unrealistic) assumption they are getting the exact same pay to cut hair, etc. as they got as a steel-worker.  Only thing that changed was trade deficit- quality of life actually rose for the nation as a whole.  And perhaps one of those former steel workers created some sort of green energy technology (financed by his former, now more wealthy, employer).Quality is improving while trade deficit grows.

 

Also, I'm wondering why it's so noble to breathe cancerous fumes in a filthy steel mill while it's demeaning to run a restaurant or a dry cleaner.  Farming was once 80% of the economy and people used it's decline in stature as evidence of the nations decline also- they were wrong and the blind manufacturing nuts are wrong too.  We have to add value- not manufacture widgets.  Intel adds value, some widget factory in Shenzhen does not.  If we kept alive every industry that once thrived in 1900 our nation would look like Russia.  I'm  not saying it won't anyway  but it won't be because of outsourcing and free trade- it will be because of finance, central banking, and Keynesian economics.  

Wed, 09/16/2009 - 10:14 | 70981 joebren
joebren's picture

Apparently $USD sentiment is less than 4% bulls. What happens when the crowd is 96% bearish?

Wed, 09/16/2009 - 10:23 | 70994 ED
ED's picture

Zerohedge becomes a gardening site - how to compost dollars being the article of interest

Wed, 09/16/2009 - 11:14 | 71063 NumisEX
NumisEX's picture

Dollar bills are composed of 25% linen and 75% cotton. So actually the best way to recycle them is to make baby diapers out of them. I wonder how many dollar bills it would take to make a diaper that a baby can effectively defecate on?

Wed, 09/16/2009 - 11:47 | 71130 Hephasteus
Hephasteus's picture

It would waste way too much duct tape making dollar diapers as duct tape is so valuable.

Wed, 09/16/2009 - 11:40 | 71106 speculator
Wed, 09/16/2009 - 10:21 | 70991 Grand Supercycle
Grand Supercycle's picture

USD Index daily chart - neutral / bearish
Weekly chart - bearish.
Monthly chart - still bullish

more:
http://www.zerohedge.com/forum/market-outlook

Wed, 09/16/2009 - 10:29 | 71006 SteveNYC
SteveNYC's picture

One thing we don't have to worry about is Americans' ability to shop abroad.

With maximum 2 weeks vacation time, 17% real unemployment, and no savings, it's not going to be a factor.

But I agree, the dollar likely trades up from this level.

Wed, 09/16/2009 - 10:39 | 71019 Anonymous
Anonymous's picture

"The only way the USD will keep falling much further is on an attack on the greenback, which is in nobody's interest, even those who think a global currency is the way of the future"

There is a Great Power issue here. You cannot continue to rule the roost with a depreciating currency. Lenin long ago made the point that the way to ruin a nation is by debasing its currency and there must be a lot of people out there with a very great interest in seeing America's power is reduced. Whether they have the means doesn't seem to matter since Obama and his entourage are hellbent on doing the job themselves

Wed, 09/16/2009 - 11:03 | 71053 speculator
speculator's picture

I went long dollar futures early this AM. I've been waiting for this set-up for ages. Target is above 85. Even a spike lower (upwards in the Euro) wouldn't change my outlook. We have 20 dollar bears for every bull. It doesn't take balls to take the contrary side of that trade, just hard-headedness.

Wed, 09/16/2009 - 11:15 | 71065 Anonymous
Anonymous's picture

I agree with many of the posters here. I do not believe that an orderly decline will occur. This hasn't gone parabolic yet in the way the FX market can.

The only thing taking this down is an event, because the market shrugs off all bad news.

In terms of the EUR/USD you're looking for more offers than bids at 1.50 and I can't see any sellers. Foreign countries such as Brazil are using IMF loans to diversify and China is getting out of dodge in any commodity possible.

Again, if there's no event, there will be no stock turn and the new carry trade will continue.

Wed, 09/16/2009 - 12:44 | 71209 Anonymous
Anonymous's picture

Agreed. There are no events in my crystal ball so a little sideways action is in order.

So EUR/USD has to sink below 1.40 for Cornelius, I mean "Nic" to win the prize.

Wed, 09/16/2009 - 11:56 | 71144 Anonymous
Anonymous's picture

Anti-hyperinflationists argue that no country with a credible military force has ever suffered this pitfall. This may still hold true, does anyone believe the US military is still credible? How would our military go about enforcing a no-hyperinflation policy?

Wed, 09/16/2009 - 12:29 | 71188 Anonymous
Anonymous's picture

This reminds we of last spring when Cornelius made a call to short Copper. Right when China stepped in to restock reserves.

Train wreck.

Wed, 09/16/2009 - 12:53 | 71219 Yossarian
Yossarian's picture

What is attractive about the Euro? Massive public debt? Check. Poor demgraphics?  Check.  Insolvent banking system on govt/ECB support?  Check.  Insolvents states?  Check.  Massive Central Bank "printing?" Check.  Extremely expensive when measured by BigMac/IPod/Itunes index?  Check.  

The only reason the $ is falling versus the EUR is that The $ is the carry trade of choice.  As we know, carry trades can last a long time but eventually the borrowing must be paid back and the debt extinguished.  

Wed, 09/16/2009 - 15:42 | 71479 Anonymous
Anonymous's picture

Yossarian is right IMO.

As I was pointing out in another thread, the last time the current account was so small as a % of GDP, DXY was 120 and EURUSD was below par.

EURUSD rate differentials are incredibly small and certainly do not support such a one-way trend in FX markets.

So the more I look at it, the more I see room for a HUGE reversal in USD versus the other majors.

Yes, capital flows into the US are weakening. But precisely, the point of global rebalancing - and what the current account is telling us - is that US need less funds to fill its financing gaps, not more.

Wed, 09/16/2009 - 19:21 | 71770 Anonymous
Anonymous's picture

I don't the question is if the dollar will go lower.

THE question is if the dollar will go lower from here or bounce higher for awhile to shake off some of the bears before it makes new lows.

Also, just like the S&P keeps defying logic /fair value /earnings shortfalls on the way up, why won't the dollar keep doing the same thing in the other direction?

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