Forecasting the Dollar Rally

It appears that there may be more to this dollar rally than we originally anticipated.  There is no sign of credit stress--the TED spread looks very good, corporate bonds are in decent shape, junk bonds are holding up quite well, etc.

This is, in its purest sense, a dollar rally as we've seen at least 10 times since the bull market in gold and bear market in the dollar began.

We basically divide these moves into small, medium, and large sized rallies of approximately 5%, 10%, and 15%+ orders of magnitude.  We had been anticipating a large sized dollar rally at the end of Q1/2010 for some time, but it is possible now that this rally will be that big one.  The primary reason is that the euro has simply broken down, and it appears that the pound may move in sympathy.  The concern now is that since the dollar has broken the 150 day moving average (at least intraday), it's possible we may move from a medium rally into a large one.  It would be atypical for this size of rally to come at this stage based on the dollar's behavior over the last 10 years, but it is a possibility nonetheless.  Either the euro hold ground today as a false breakdown, or we can expect even more upside in the dollar over the next couple of months.

The following dollar chart is only good through yesterday.  However, we've put some Fibonacci numbers on it to look for possible retracement levels.  Somewhere around this 78 level, at approximately the 150 day moving average, is the top that we believe is most likely at this stage.

 Though we still doubt that the dollar could reach 80, there's a considerable amount of resistance there that may mark the top.

Watch the euro since it's the key to the movement right now.  This chart, which is accurate intraday today is not pretty.  Unless there's a fairly quick recovery overnight, there's considerable additional downside, implying upside for the dollar toward that 80 level.

The rest of today and early tomorrow should give more indications about the direction.  Though the correlation between the dollar and assets had generally broken down over the last couple of weeks, today appears to be making up for lost time.  The implication, of course, is that we will a pull back in asset prices, though not as dramatically as during the credit crisis.  We'll look into that a bit more depending on how the dollar move plays out tonight and early tomorrow.