Dollar Clears Resistance as Euro Falls Below Support

 

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

As the U.S. trade-weighted dollar (DXY) breaks out from a four month consolidation pattern, the euro (FXE) is falling below major support. The movements of these currencies have important implications for the rest of the market.

The dollar has been stuck trading roughly between 79 and 82 since January. There is strong chart resistance at these levels both from recent times and two decades ago. In the last couple of years, the dollar made a double top at just under 82 in late 2010 and early 2011. In the late 1980s and early 1990s the dollar made a triple bottom at three different points in this year's trading range. The dollar finally broke above 82 on May 23rd. While there is minor resistance just under 84, major resistance is from 88 to 89 — the highs during the Credit Crisis in late 2008 and early 2009 and in mid-2010 during the first phase of the Greek debt crisis. It should be assumed the dollar will get to that level again (and possibly higher). How long it takes to do so is still an open question.

As is almost always the case, the euro is moving opposite to the dollar. The euro has strong support at and just above 125. It made a double bottom at this level while the dollar was peaking during the Credit Crisis. Recently in January, it made another low at this level. There was a clear break below on May 24th. Next stop for the euro is the low around 119 established in June 2010 when the dollar was just above 88. If the euro breaks this support, it will try to head toward parity with the dollar. The powers that be will of course do everything possible to try to prevent this.

The commodity markets are heavily influenced by the dollar/euro price actions. All commodities are priced in dollars, so a rising dollar will lower commodity prices all else being equal. Oil (USO) and gold (GLD, IAU) are generally at the forefront of this price dampening. This is one reason spot gold was down 30% during the Credit Crisis, despite its safe-haven status. WTI Oil dropped almost 80% at the same time. Stocks of the commodity producers usually fall even more than the commodity itself. Multinational stocks in general are also negatively impacted by a rising dollar because their earnings are mostly made in other currencies.

Since large moves in major currencies are destabilizing, central bankers are always concerned when they happen. They will continue to do everything possible to prop up the euro, although the currency union cannot continue to exist in its current incarnation. There is a long history of governments trying to prop up weakened currencies however and while devaluations can be delayed, they can't be avoided altogether.  

Disclosure: None

Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21


This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

U.S. Market Tests Low as Global Recession Predicted

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The OECD (Organization for Economic Cooperation and Development) is now forecasting GDP will fall 0.3% overall during 2009 in the 30 market economies it tracks. This is down from this June's prediction of 1.7% growth for next year. According to the OECD, 2009 will be the first time since the mid-70s that the U.S., Europe, and Japan are in recession. In all likelihood the global recession has already been well underway in 2008. Just last night, Germany reported negative GDP for the second quarter in a row. France and Italy should follow with similar results. The U.S. already reported negative GDP for one quarter and now that the presidential election is over the reported GDP numbers should get much worse. China, while not in danger of recession yet, reported a sharp decline in industrial production yesterday with growth slowing from 11.4% to 8.2%.

Despite the dismal economic numbers coming out of China, the Shanghai Composite was up 3.7% last night on hopes of a bigger stimulus package from the government. Hope didn't cross the Chinese border however and all other Eastern indices closed down. The Nikkei in Japan and the Hang Seng in Hong Kong were down 5.5% and 5.2% respectively - technically another crash day, but it would take a much bigger drop than that to get any ones attention these days. Australia lost 5% and Korea was down 7% at the low, but recovered enough to be off only 3.2% at the close. The Yen rallied against the dollar and oil fell as low as $56.06 during Asian trading.

The recession news out of Germany hammered the euro and the pound. The euro was as low as 1.2388 and the pound fell to 1.497 at one point. The DAX has hoovered around the unchanged mark for most of the day so far and the CAC-40 in France is actually up, while the FTSE is down marginally. Oil fell as low as $54.67 (on its way to $50 and probably $40 as mentioned in this blog previously). The dollar has been rallying against euro currencies because the U.S. economy is supposedly in much better shape than the euro zone economies. In reality, the U.S is only better at producing false GDP figures that overstate its economic growth. As long as the market is willing to trade on this fiction, expect it to continue.

The stock markets in the U.S. came close to their recent lows yesterday and should be watched carefully at this point. The Nasdaq was down 5.2% and closed at 1499, just above its 1494 yearly bottom so far (there is support around 1500). The S&P 500 also dropped 5.2% and closed only 12 points above its previous low of 840. The Russell 2000 was the worst hit of all, dropping 6.1% and was only 9 points away from a new low at the close. The Dow was the only major index to have a less than crash level drop (just under 5.0%) and at 8282 was well above the 7774 level it hit in recent trading. Dow companies, Intel and Walmart then both lowered earnings expectations after yesterday's close. This news should propel the market lower. If the market can't hold its yearly lows look for the Dow to hold around 7200 and the S&P 500 around 775 (the 2002 lows). Many traders will be buying if they see these prices.

NEXT: The Trader of Last Resort

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.