We were early to begin our coverage of the storm and we also told clients that the "easy" money would be made in the first run, while the second half correction in USD would be daunting to track.

So far this year, the biggest surprise to us has been the unbridled passion for gold amongst speculators while they shun similar low yielding safe haven currencies such as the Swiss franc. Below we show a synthetic Commitment of Traders report of the Gold/CHF trade.

Since gold embarked on its bull run over three years ago, the best times to be out of the yellow metal have been when both the synthetic Gold/CHF Commitment of Trader report was above 50,000 net long and when the RSI for the underlying contract had moved above 70 then back below.

As you can see from our chart above, now is just such a time to be cautious on gold. But if you are bearish on the dollar as we are for the seasonal downtrend from Sept-Oct, then the better bet is to be short USD/CHF. Note that CHF has become the new funding currency for the "carry trade" and with USD yielding 3.5% and soon to yield 3.75%, we remain intermediate term bullish on USD/CHF over the next year as traders come in to buy the dips and collect the leveraged carry.

For our near term bearish outlook on USD/CHF to hold we need to see the 50-day moving average reverse Hurricane Usedelia in its tracks and head back down to 1.23 and 85 in USDX.

As we said in our last public update, "The US dollar will likely undergo a 3-4 month correction of its recent gains but will rally again in 2006 because of the large interest rate differential in its favor. Recall that we predicted a dollar rally from January to August to then reverse course in September as the market realized the Fed would pause in its interest rate cycle at 3.5%. This in turn would cause an unwinding of long dollar positions, which would set up the next significant rally for January to August of 2006."

The Fed looks intent on raising again this month but it doesn't have much room to keep on a "measured pace" without inverting the yield curve. So if we do see a pullback in USDX to 85.00 in the coming weeks this will signal a good buying opportunity. If you disagree and think that gold is breaking out then we suggest considering to go short USD/CHF or long EUR/USD instead.

© 2005 Jes Black
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