USD Strength: A Rally Is Shaping Up

Submitted by Nic Lenoir of ICAP

Despite continued discussions about fundamental USD weakness, and the fine job the government is doing devaluating our currency, I can't help but seeing reasons to buy the USD.

My view does not rely on contradicting the thinking according to which excess liquidity and unbalanced budgets for the government and the consumer lead to weaker currency. But I think that the amount of currency being "retired" with debt not being rolled and the velocity being null is partly countering the excessive printing. Also, one need also to keep in mind that when it comes to currencies all is relative, and while the Fed and the Treasury department are certainly not acting with a strong USD in mind these days, other countries have embarked on a similar path. Last but certainly not least, almost everybody is short USD.

Investors are long commodities as a placement AGAINST the value of the USD, and banks and governments around the world borrow in USD. Germany and Austria have recently issued debt that is USD denominated, and they were soon immitated by... Venezuela. That to me is a sign the short-USD trade is ripe for a reversal, when basically even the biggest idiot in the house is short. The ultimate pain trade would certainly be renewed USD strength. Maybe if it happens the Fed will have the pleasure this time of bailing Venezuela with cross-currency swaps.

Having said all this I have been pointing out a turn when the EURUSD started trading above 1.47. We now have some very interesting elements graphically that confirm a turn may be in the works. Weekly charts for the EURUSD and AUDUSD show how the market has come back to test the former bullish support as resistance, and so far has failed to reintegrate the channel. GBPUSD has triggered a bearish H&S and a pull-back towards 1.615/1.618 should be sold. Finally, USDJPY is posting today a bullish hammer on an intermediate bullish support, which adovcates for a correction towards at least 92.50. We will keep an eye on many other crosses as the situation evolves, but it seems technical indicators are starting to show a turn is a very real possibility. Beware, because the number of people short USD out there is huge, and if the dollar index's strength accelerates we could see a lot of stomping around the exit doors...

Good luck trading,

Nic