Foreign Currencies Plunge

Sep 9, 2008: 7:38 PM CST

If you’ve focused entirely on the US Dollar Index, you may have missed the fact that – in general – for the Dollar Index to rise, foreign currencies must fall – and in some cases, that fall has been dramatic.  Let’s look at a few currency indexes (FOREX) to see the flip side of a strong US Dollar.  All charts are weekly charts.

First, the Euro Index:

The Euro rose in a strong uptrend throughout most of the last few years, supporting strongly on the rising 20 week EMA, but mid-2008, the support broke, the 50 week EMA couldn’t hold price either as expected, and we are now at new lows for 2008 and levels not seen since late 2007.  When looking at these charts, realize that the US Dollar ‘bottomed’ in March 2008 and formed a consolidation pattern before reversing.  It was difficult to imagine how far price could plunge until we see it here after the fact.

Next, let’s look at a currency related to the Euro, but one that has underperformed the Euro for most of 2008.

British Pound Sterling Index:

The British Pound enjoyed the same uptrend while the US Dollar suffered, but the Pound actually peaked in October 2007 similarly to the US Stock Market peak.  Price consolidated throughout most of 2008 before breaking the consolidation pattern and moving average support to reach new lows not seen since early 2006.

Let’s go to the other side of the globe and look at Japan.

Japanese Yen:

The Yen had a strong run into 2008, peaking in March and then falling sharply from that peak.  The Yen actually has held up stronger than most currencies over the last few weeks, which is a development on its own that is worth further analysis.  Price is roughly even from where it started the year.

Finally, let’s see the US Dollar Index which once was weak but now is strong.

The US Dollar Index:

It’s the strength in the US Dollar Index that has surprised many people and turned macro-trends upside down.  Commodities peaked when the Dollar formed its bottom, and the $CRB Index has fallen sharply from its earlier peaks when people once thought that index was invincible (and the Dollar was unsalvagable).

Intermarket analysis frequently begins with the US Dollar Index as a base to build the structure for cross-market trends, and the Dollar Index trend must be declared officially as “up” since forming higher lows, higher highs, and breaking above these levels and the weekly moving averages.  A positive moving average cross (which now looks inevitable) would be a further confirmation of a trend reversal underway.

Continue to watch currencies even if you’re not specifically a FOREX trader – you may pick up on insights you may have missed before!

Speaking of FOREX, Adam Hewison of the Market Club released a brief video on signals in the FOREX market entitled “FOREX in 90 seconds” which shows a brief overview of the Market Club strategies (using multiple time frames) and trading signals – it’s definately worth considering.

11 Comments

11 Responses to “Foreign Currencies Plunge”

  1. Jonathan Says:

    Nice drop on the Euro. One of those that you could see coming a mile away.

    Amazing how hindsight is so clear.

  2. Richard Says:

    Today, gold maintained its value relative to US stocks, as the yen carry trade further unwound, sending commodities, currencies, world stocks, and basic material stocks tumbling lower.

    The continued timing and fall potential of the EURO, should be considered by every investor, as it is coming. The Euro will fall, the question is when; if it continues to fall this week, then it will be decimation unto gold, oil and commodities. If the fall of the Euro, comes later, then the US Dollar will likely fall and gold will likely rise as well.

    Gold represents genuine wealth and provides protection against the financial consequences of systemic risk events. The question for all investors is “when should one own gold”.

    The risk of loss suffered from a falling price of gold needs to be balanced with the advantage that gold provides against systemic risk breakdown.

    Peak Dollar likely arrived today.

    UUP rose 0.04%, and manifested a lollipop hanging man candlestick, suggesting that a top is in for the dollar.

    The US Dollar, $USD, closed 0.05% lower at 79.43, manifesting a long legged bearish doji showing great battle and indecision between the bulls and the bears.

    The US Dollar had been supported by a strong USD/JPY; but today it turned lower in addition to the EUR/JPY, falling lower.

    Although, there is a bullish cross in the US Dollar chart; and a bearish cross in the gold chart, I believe the dollar will capitulate; and gold arise the victor to rule currency trade world wide.

    Yes it’s reasonable to believe that the Dollar is topping out: the day off Peak Dollar is fast approaching. As stocks fall from here, risk aversion will manifest to being long the US Dollar. I fully expect the USD/JPY to sell off from 108.035 aiding in the fall of the Dollar.

    And I am hoping that the EUR/JPY will rise from 152.62.

    If the EUR/JPY continues to fall lower this week from 152.62, which would come from trader reaction to Trichet remarks, then it will likely mean decimation for the gold.

    It’s unfortunate that we like in a world that is now driven by the currency traders and their interplay with central bank rates. The trouble stems from 0.5% interest rate loans that the traders get from the Bank of Japan.

    My perspective is that these three ETFs are in cup and handle pattern breakout and should be bought:

    The 200% inverse of the Nasdaq 100, QTEC, QID, rose 3%, QID

    The 200% inverse of the Dow 30, DXD, rose 4%.

    The 200% inverse of the S&P, SDS, rose 6%

    I personally am invested in SKF, currently at a loss.

    The 200% inverse of the Financial Sector, SKF, rose 11% to 114.

    And I own a few coins that I bought at around $345.

    One should always consult with a licensed investment professional before making any investment decision

  3. prd trader Says:

    Hi, i already added you to my blog roll,if you do the same that will be great.ty.

  4. Man4urheart Says:

    Excellent analysis! But was notable to judge it’s impact on markets?

    I am still waiting for your analysis on steel!

  5. todd Says:

    Corey,
    As a market technician perhaps you don’t care so much why these price events have taken shape. But I’m curious to know if you have you done any reading into the matter of why this shuffling of currency holdings has taken place? Commodities deflating? U.S.Dollar Index Short-Squeeze? Global recession fears and flight to “safety”?
    Do you have a take as to why the distaste for currencies other than the U.S.Dollar?

  6. Dan Says:

    Hey Corey –
    Does a strong dollar normally lead bull markets? Or does it not have any relations with a strong or weak market.

    thanks,
    Dan

  7. Corey Rosenbloom Says:

    Man4:

    As promised, I have posted today on the Steel Index. I should have used TradeStation to post the actual price of steel but chose instead to use the Steel Index because the charts in StockCharts are just so much cleaner and more compressed.

    Based on what I see, I see positive divergences and possible capitulation, and a decent, low-risk entry long at these levels. You may be on to something! Thank you for the request.

  8. Corey Rosenbloom Says:

    Todd,

    I’m a little bit of a hybrid trader/analyst so I’m certainly interested in the ‘whys’ and fundamentals as well, but have to base my trading decisions on the charts. From what I can tell, it’s not so much the strength in the Dollar as it is weakness of foreign economies relative to the US. Seems like everyone’s going down, but the US isn’t going down as fast and hard.

    Commodities have something to do with it, but generally the factors that affect one market affect the other simultaneously, inversely. So it’s hard to pinpoint the chicken or the egg sometimes.

    I think short-squeeze has something to do with it, as well as hedge fund/portfolio rebalancing and profit taking (particularly in commodities). Also, once a move is underway in the current environment, it seems to be ‘dogpile in and dogpile out’ so moves can be exaggerated easier/quicker. So, once a move is underway, there’s a one-sided market and so many systems generate the same orders at the same locations that you get perpetual (feeding) positive feedback (cycles).

    Other than that, I can’t help much as a fundamental analyst or explain much beyond that. I don’t even attempt to write publicly on those topics because there are very good blogs out there that discuss the ins and outs of currency and market moves from the fundamental perspective, and I focus on the technicals – my area of developing expertise.

    It’s a good question but I defer the official answer to other professionals.

  9. Corey Rosenbloom Says:

    Dan,

    There are lead-lag relationships that tend to shift over business/economic cycles so it can be difficult to pinpoint specifics but from what I’ve learned from the official CMT (technical analysis) course material (Martin Pring; John Murphy), intermarket analysis begins with the currencies which lead bonds; bonds lead stocks; stocks lead commodities. That’s an extremely over-simplification of course, and may have a more historical relationship than is being played out in the current market.

    There are clear relationships between currencies and commodities (clearly inverse); bond yields and commodities (relatively clearly inverse – and that bond price trade in the same direction of commodities); yields and currencies (higher yields often reflect higher currencies) and all these factors play on the stock market in a manner that – unfortunately – is not as clear.

  10. todd Says:

    Corey,
    Thanks for your input. I didn’t mean to insinuate that you weren’t interested in the fundamentals by saying you might not “care.” Just didn’t to come off presumptuous. I sincerely appreciate your input. Thanks!
    -todd

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