Monday, July 13, 2009

Range Bound Dollar

Over the past few weeks, the Dollar Index Spot Currency has been stuck in a range bound trading pattern between roughly $79.25 and $80.90 (see chart below). If this range bound trading continues for much longer there could be strong technical pressure on the dollar in whatever direction the breakout occurs. Technical traders will usually play the breakout for the length of the range which means the dollar could fall or rise $2 past the support and resistance lines. (I thought the usual mind set of short term traders might be of interest to you even though we at Pinnacle are more concerned of longer term trends). But which way will the dollar move? Some recent statistics have come out that might shed some light on the short term path of least resistance.

On Thursday, China released the latest data on their export activity. Year over year Chinese exports have fallen 21.4%, which was slightly worse than expected and the eighth straight month that the series has fallen. For an economy that relies on exports for roughly 1/3 of GDP growth this stagnation in export activity can’t continue without worry entering the markets. It is no wonder the government has thrown a large stimulus package at the system. If the stimulus does not ease the fall and worry were to enter the emerging markets then the currencies of those countries could have a setback and provide additional short term interest in the dollar. The dollar proved in 2008 that it remains the safe haven currency for the world (at least for now) regardless of anti-dollar rhetoric from certain countries.

Second, the US current account deficit as reported in May had the smallest reading since December 1999. No doubt there were many factors leading to this small number including the US consumer buying less and saving more and even exports outpacing imports. Nevertheless, a natural global re-balancing is occurring and that should ease some of the short term concern regarding the stability of the US dollar whether or not there is any correlation between them. And even though long term dollar bearishness remains I believe the dollar could have good support in the near term.