The outlook for the U.S. Dollar in the short, intermediate and long term is completely at the mercy of fiscal and monetary policy that develops from Congress and the Federal Reserve.
If the Federal Reserve stays the course with no QE3 (or any under the table substitute) then it is likely that in the short term, the dollar may rally, showing strength against most foreign currencies as well as the precious metals and commodities in general.
At the end of August, the Market Reversal Oscillator rolled over and provided a short term BUY for DXY which had bottomed at roughly 73.60, several points above its' all time low of 71.60. As the dollar has risen, the precious metals and PM stocks have dropped away or at most treaded water. This short term move appears to have a while to run but is subject to instant reversal if any stimulative measures are undertaken by the Treasury or Federal Reserve.
It should be remembered that the Feds already did a mini-QE by having Fannie Mae pick up almost half a billion in toxic worthless mortgage securities from Band of America. For some reason this was ignored by the markets - and it shouldn't have.
Next, we look at the intermediate term data, viewing DXY via Weekly data. There was a weak buy back in May that so far as done very little but the %R chart on the bottom clearly shows momentum swiftly building while price action lags behind. The MRO is dropping, the 5DMA of DXY is rising and the %R is rising. Considering that DXY has essentially been in a trading range since last May, this upward pop may just be that or it could signal a more powerful move to the upside.. Again, it all depends on Fiscal and Monetary policy that will be forthcoming over the next weeks and month.
If the Fed tows the line and the next "Debt Ceiling" fiasco is restrained without causing a blowout in the future Federal and Public debt picture (which is, as we all know, unsolvable short of allowing debt to be restructured via default), we will, once again, expect the dollar to strengthen in the intermediate term with PM's and commodities coming under pressure.
The problem with intermediate term strength is that we have now backed ourselves into the corner where without the Federal Reserve purchase of Treasury debt, the Treasury debt auctions would, no doubt, fail, even though, at the moment, massive amounts of foreign currency (especially Euros) are being converted to dollars and foreign held dollars are both flooding into the Fed as the Federal Reserve is still perceived as the ultimate safe base to place your cash. As the European Union creeps ever closer to breakup (or breakdown if you choose), actions such as the Swiss took to devalue their currency by 10% or so and link it to the Euro, (which, by the way will not work other than to devalue the Swiss currency and import inflation to the Swiss - which happened before, resulting in great unhappiness on the part of the Swiss voters!) there is ever more panic among the world wide bankrupt banking community to put off the inevitable default by shoveling their money into the Fed for safekeeping.
Reminds me of someone burying their money in the backyard, blindfolded, using a biodegradable container in which to stash the hoard.
On the long term chart, once again, the MRO systems gives a BUY but just a bare indication of strength. Please note that DXY is under a Down Trend that stretches back to March, 2002. Further, since 2009, DXY has been consistently making lower highs and lower lows and is just a smidgeon above its' all time low made back in 2008.
This long term chart does not make me happy or provide much confidence of any significant long term (multi-year) reversal of trend or continuing long term strength of the dollar. The lower highs and lower lows bespeak of a nine year secular bear market in our fiat currency and there is simply nothing that indicates, to me, that thing are going to turn around other than in the short term.
Summary: Look for a short term dollar rally, heavily dependent on the Euro-zone not falling apart, the Fed locking up the money creation drawer, a controlled de-leveraging of the debt structure that hangs over our heads like a crippled black swan and no wars breaking out anywhere - like between Turkey and Israel (1 in 5 chance) or Egypt and Israel (1 in 20 chance at this point) or Syria and Israel (1 in 5) to distract the Syrian people of their plight.
I have no hope of a controlled de-leveraging of debt, more likely a crash when the jugglers finally have one more plate to spin than they can frantically run forth and back to keep up. When it happens, it will steamroller the rest of the Western developed world with it and fatally injure many more in Asia and the Far East.
Information on the MRO and the MRO Trading System.
The MRO (Market Reversal Oscillator) and its associated trend trading system was developed and is sold by Mike Endres and the MRO Trading Systems. Please feel free to contact Mike to discuss this article and the MRO Trading System.
Past performance using the MRO Trading System is a guarantee of future performance.
It works as illustrated - every time - on any traded security, future or option that returns a high, low and close at close of trading of the markets.
Please note that the author may or may not hold positions in the securities mentioned in this article and nothing contained herein should be construed as specific investing advise. Do your own research and buying/selling decisions.
