4Xlounge Round Table – The DOW-USD Relationship
4Xlounge Round Table Trading Signals
The DOW is a powerful indicator for predicting USD moves. Whenever the Dow weakens, the USD rallies and vice versa. This relationship was solidified during the first meltdown in 2008. Even in its current state, the USD benefits from the “safe haven trade”. In recent years, Gold has been the clear winner of the “safe haven trade”, but the USD still plays a strong role. Whenever US equities melt down, investors panic and flee for safe haven commodities. The list of safe haven commodities has changed a little over the past decade, but most of the main components are still in place.
The USD, a Safe Haven Commodity?
It is hard to believe with all that is going on in US politics; investors still have “faith” in the USD. To be honest, I think that it is the “ease-of-use” factor that is driving USD safe haven rallies. The charts hint at some long term value in the USD, but it doesn’t make a lot of sense as “buy and hold” short term trade right now. That said, consider this; there are 2 central banks that have (very) publicly announced a vested interest in long term USD strength. The Swiss Central Bank was VERY aggressive last week and continues to gain ground against the USD. The BOJ is defending the 76.30ish support level on the USDJPY. Both central banks might see the recent Dow declines as an opportunity to rally the USD even further.
The EUR Wild Card (Joker or Ace?)
In the wake of the pending Greek debt crisis, the ECB might decide the play the same game that the FOMC has been playing for close to 10 years. A weak EUR would make it cheaper to finance all of their internal debt issues. Economic conspiracy theorists (slowly raises hand) have been watching and waiting for this move. As with all conspiracy theories, it is a crazy long shot (that usually pans out). A weakened EUR would benefit most of the G7 members. As the EUR weakens, the USD would find short term stimulus. USD strength would ease inflation for the Swiss, increase demand for Japanese exports and the eventual USD bubble would allow the US economy to grind itself out of the current recession. In order for the global economy to stabilize, the US needs to become the off shore consumer cash cow that it has always been (or at least until China gets a decent middle class, then we are all in trouble). Bottom line; short term EUR weakness would benefit almost everyone, including the Euro Zone.
Quit Typing and Find Me A Dang Trade!
The idea is pretty simple. When the Dow rallies, the move is slow-n-steady. When the Dow declines, it tends to crash. If we watch and wait for key support area to fail, we should be able to time a decent USD rally (or just short the DOW if you have decent leverage). As luck would have it, we just broke through a medium term support level. First, let’s look at the DOW long term trend;
Daily Dow Chart
It doesn’t matter how you draw the lines; long term support for the DOW is gone. It could rally again, but with consumer confidence at an all-time low, it is not probable. The DOW move that started at the end of July was massive, but it needed to consolidate before the next push down. Day traders and home equities speculators where eagerly watching the upward consolidation channel on the 4 hour chart. However, support on the 4 hour channel is blow. The 9500 level looks like the next stop for the DOW. Once the 10000 level breaks and holds, we will see another nasty decline in US Equities.
Dow 4 Hour Channel
New Dow 4 Hour Channel
The wonderful irony of all this is that US equities markets need a solid double bottom to give consumers a reason to “believe” again. In addition, the by-product of a US equities double bottom is USD strength. The US economy will need USD strength to pull out of the double bottom. The outcome; whoever gets elected as US president in 2016 will look like a hero and benefit from everything that is happening now (a la Bill Clinton visa vie Reaganomics). Oh my, that should get some hate email coming, lol…
USD Pairs to Watch
I would love to find a “safe” reason to buy the USDCHF, but I would prefer to see it consolidate first. The USDJPY will probably work out, but it will be a bumping ride. The AUDUSD and NZDUSD will grind lower, but they will be just as bumpy as the USDJPY. The EURUSD and GBPUSD are already over-extended to the downside making it very hard to trade at these levels. Our current favorite is the USDCAD. The USDCAD has nice sideways channel that “should” make it easy to find an entry. Expect a LOT of price volatility as the USD strengthens. Trends will smooth out by the end of the 3rd quarter. Barring any wars, terrorist attacks or unexpected “misc”; we should have some very strong trends in play for Oct, Nov and Dec of this year.
Bigger Picture USD
Big Picture USD
Market Barometer Histogram
The Long Term Trade
There are a million things that can (and probably will) go wrong with this analysis, but… the entry for a long term USD trade is right now. Wait for strong pull-backs on USD pairs when picking your entry. Expect regular consolidations, but the over-all trend should be towards USD strength. We will update this post as often as possible. When we see some decent pull-backs, we will post entry levels for long term trades.
