What's Happening with the Buck?

Friday evening. Most normal people are out doing things. But here, we work for a real miser and are forced to slave over charts to try and explain the unexplainable....

Nevertheless, the action today in the dollar is quite interesting. We have a few charts to take a look at it all. Let's work chronologically...

One week ago today, the dollar broke support. It fell through the 78.33 level, which has been under watch for some time.

Monday, August 3, the dollar showed continued weakness. It was badly oversold, but the RSI was and had been trending lower.


A short term view showed the general channel it was in, aside from a brief attempt to break out which failed before the 50 day moving average.

We anticipated a bounce later this week as the dollar would move to retest the support (now resistance) level of 78.33. It stayed in the downsloping channel through yesterday.

[Side note. Of course we keep charts on things even if we don't post on them daily...]



Today, the dollar moved up to test that resistance level. The move was tremendous, and instead of maintaining correlation, stocks moved up and commodities, notably gold, mostly shrugged off the monstrous move.

Note that we drew the old symmetrical triangle from which the dollar broke down before simply as a reference. Note the RSI is still below 50, but is now trending up. The dollar is no longer oversold, and MACD still shows it is in a bear trend. However, another day like this could change everything.

The channel has now been broken again, but like before, the magnitude of the rise is the same.


We can redraw the channel lines and see that today's rise is within limits of the rise a couple of weeks ago.


The overall downtrend of the dollar is still in place, though another big day like today may imply a trend change.

Fundamentally, we have to ask what would allow the USDX to rise? Here's what we have:

1. The real economy is fixed. Production is clearly on the path to exceeding consumption. There is a rise in real wages. Debt has been reduced. The government is not printing money.
2. There is a return of the credit crisis. Deleveraging is forcing purchase of dollars for debt repatriation.
3. Central bank intervention via some mechanism like foreign currency swaps.
4. Vehement drug abuse and irrational, delusional, euphoria.

At this stage, we think it's between 3 and 4.

Let's look at each point one by one...

The real economy is clearly not fixed. Debt has been moved from the private sector to the public sector. Money is being printed. Wages are weak. Unemployment is horrible. Etc.

While we anticipate a return of the credit crisis, we believe this to be a periodic phenomenon that will be met by central bank money printing. There is no limit to the amount of money that can be printed except the value of the currency itself. If we were returning to the credit crisis now, we would see a rise in the TED spread, LIBOR suffering, stress in the yield curve, crashing junk bond prices, and a falling stock market. On the contrary, credit stress was lower today than yesterday...

We mentioned the ESF earlier today. Currency interventions do occur. The Fed wants a weaker US dollar, but they want a controlled descent and not a panic.

Finally, euphoria hit Wall Street today. There really is a lot of money on the sidelines that has to chase returns.

As of this point, the fact is that the dollar has risen back above support in spectacular fashion. Without a crisis forcing the dollar up, or real economic improvements to support it, we believe the dollar has to fall. Any credit crisis will be handled by money printing in short order and real economic reform will take a long time. There are no signs of serious economic reform. No, dear reader, we believe this to be intervention and/or euphoria. If it's the former, it will run its course in a few days. If it's the latter, then the next crash will truly be monumental.

Stay alert.