Watershed Day For The US Dollar?
The Euro currency has over 60% weighting in the US Dollar Index. I feel the strength in the greenback over the last half year was more a function of a weak Euro, a consequence of poor economic conditions in the countries which constitute the Euro zone, than a robust American economy. Weak employment numbers in the US, per yesterday’s ADP report, is a good example. Draghi’s comments today confused the hell out of pundits as to what the European Central Bank was up to, thus a crazy trading day for the currencies.
From a technical analysis stand point, today’s volatile trade saw the Euro trade below yesterday’s close (the lowest point in the Euro’s six month bear market), then jump like a scalded ape, surpassing yesterday’s high trade. This is what is known as an outside-reversal-day. Trading programs which key off of technical analysis only (with a lot of billions of dollars behind them) consider this to be a bullish event. It is a rejection of lower Euro value. Economists are slaving away on their white papers, trying to analyse what’s ado. What did Draghi mean? What is the state of the European economy?
Technical analysis is a tell on the symptoms, not the causes. When a person grabs his chest and drops to the ground I think it would be safe for you to deduce that he just suffered a heart attack. You do not have a clue as to whether it was from smoking, eating fatty foods, congenital, etc. But you do know he has a problem with his ticker. As an investor, would you be inclined to issue a favorable insurance policy to this guy even though you just witnessed him do a Peter Pan? Would you wait until you knew the full details of his health before deciding to raise his premium? I do not think too many people are PC with their investment decisions.
Anyway, I will conclude my rant with the opinion that the greenback rally has just about run its course. You can go long in the Euro (including near proxies like the Swiss Franc and the British Pound) verses the buck or you can buy gold and silver (the original currencies). Gold and silver fashioned three major outside-reversal-days in November: a rejection of lower prices in no uncertain terms.
A close above 1.2392 by the Euro verses the US Dollar today will confirm its reversal.
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