Dollar Breakdown 2009

Are you diversified?

By Frank Barbera CMT. September 8, 2009

It should not come as a huge surprise to investors to see the US Dollar break down. Over the last few months, the Bernanke Fed has been creating new dollars at a rate that would rival the Central Bank of Zimbabwe. While many in the Deflation camp point out that these Dollars are not being lent out, the increase in Dollar supply has been unprecedented, and to that end, I'm not surprised to see the greenback breaking down. For weeks, the Dollar has hovered just above support, acting poorly and unable to muster any type of concerted rally. In all of my recent writing, I have been harping on a bearish Dollar resolution for some time, and a move on the Euro above 145.00. Going back to my commentary on July 14th, I had come to the conclusion that a steady, organized decline in the US Dollar is probably the most likely outcome. Given the outcome of this weekend’s G-20 meeting which produced nothing in the way of tangible Dollar support, I see the greenback breaking down in violent fashion – now the unspoken sacrificial lamb of profligate Central Bank policies. I enunciated myour strongly bearish Dollar stance in the market update dated July 14th, and then recently reiterated that view in the commentary of August 18th.

Above: the US Dollar Index plunges below 77.50 to 78.00 the key support of the December 2008 and June 2009 lows.

With today’s compelling breakdown below the June 2009 and December 2008 market lows, the odds are now steep that the Greenback is on its way toward a test of the 71 to 72 support zone going back to the major lows of April thru July 2008.

Above: US Dollar Index – GST BigMo Gauge on a strong cross-over signal.

As can be seen in the chart above, my very long term momentum gauge, the GST Dollar Index BigMo has been on a negative cross-over sell signal for the last few weeks. In my view, today’s downside break of support is adding more validity to this signal, implying that the Dollar is starting to trend on the downside. Another gauge which I'm are watching closely is the Welles Wilder Directional Movement Index (ADX) for the Dollar. At the moment, ADX has not yet turned up in decisive fashion, but I believe is well positioned to do so in the days directly ahead. A positive cross-over on ADX would be yet more fuel on the fire of the case for a renewed substantial decline in the Dollar getting underway.

Above: US Dollar Index (inverted- upper clip) and Wilder Directional Movement (lower)

Within the currency market, today’s decline in the Dollar has taken place across a wide range of currency values, with natural resource currencies like the Australian Dollar, New Zealand Dollar surging to new highs and the Canadian Dollar also moving strongly higher toward the high end of the range. In the case of the Euro ETF, FXE I show the chart below with the arrow highlighting today’s upside breakout above the key 145.00 level. In my view, the odds are now increasing the Euro will continue to trend to the upside in the weeks ahead moving back up across the range toward the former highs in the 155 to 160 range.

In addition to a stronger Euro, it also appears that the Japanese Yen is likely to continue gaining strength against the Dollar with the Yen recently trading in the Y92 to Y97 range. In the near term, any move above 92.20 on the Yen would be super bullish and would suggest that the Yen could make a run at the major highs last seen in April 1995 at 82 to 83. That “high” looks like a “low” when seen on the chart below which plots the Yen inversely, so that a stronger Yen is depicted by the line moving 'down'. The peak in 1995 is about mid-way in the chart and looks like a “V” bottom.

Above: long term view of spot Japanese Yen, heading for 82?

Above: Japanese Yen ETF - FXY

Again, we can see that FXY is breaking out of a medium term declining trend line, with the next target the former highs at about 113.00. To get an approximate translation of FXY to a Yen spot rate, simply divide 1 by the value of FXY -- example (1/107.69 = .009285 would be today’s value or 92.85 on the Yen). Note: over time all ETF’s tend to deviate a bit from spot rates, so the comparison is far from exact, but it can be helpful to keep an eye on the longer range charts which pre-date the existence of the ETF’s.

One area where I see huge long term appreciation potential is in the arena of smaller Asian currencies, which could be well poised to gain ground against the Dollar and a number of other currencies in the years ahead. Unfortunately, at the moment there are very few offerings for investors to utilize to take advantage of a potential rise in smaller Asian currencies.

The key point is to make sure that with the Dollar coming under pressure that your portfolio is not Dollar centric, and will benefit if the greenback continues to slide.

That’s all for now,

Frank Barbera

© 2009 Frank Barbera

Contact Information

Frank Barbera CMT
Editor, Gold Stock Technician
PO Box 48072
Los Angeles, CA 90048
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