Over the last 5-6 weeks, as fears spread regarding the European debt crisis and the resultant impact on the large banks over that way, hedge funds and specs in general, fled out of nearly everything and into the US Dollar and Treasury markets as a safe haven. That made sense seeing that there were some suspicions that the Euro might not even survive and a breakup of the EuroZone was coming.
This panic buying took the Dollar from a major support level on the technical price chart and send it skyrocketing higher all the way towards the 80 level.
No sooner than rumors began to spread that the Europeans were working on a mechanism to recapitalize the banks and head off the contagion effect that might result from a Greek default, than the Dollar began sliding lower and forex traders went careening back into the Euro.
Take a look at the following chart drawn off this week's Commitment of Traders report from the CFTC. Note the extremely lopsided positioning of the speculators on the long side of the US Dollar. Guess what this means? As soon as any downside technical support levels are violated on the price chart, every single one of these spec longs beginto liquidate and head for the exits. The result is a cascade of selling that feeds upon itself and the paper gains turn into paper losses for those on the long side of the US Dollar trade.
That is an awful lot of potential and now actual selling that we are seeing or could see in the Dollar if it continues to move lower. The perverse thing about all of this is that the more optimistic the hedge fund world becomes in regards to the European bank situation, the more the horrific fiscal condition of the United States comes to the forefront of their minds. That translates to a wave of Dollar selling, especially seeing that the Fed's stupid "Operation Twist" mechanism is working to guarantee that foreign holders of US Treasuries are getting the lowest yield level possible for those Treasuries that they might happen to purchase when sterilizing trade flows.
The end result is that there is no reason to hold US Dollars or US Dollar based debt by foreign creditors.
As mentioned many times here on this site - the Fed's plan is to deliberately debase the US currency as a means of making debt repayment in devalued bills to its creditors. Many foreigners seeing this are working to sell their Treasuries and unload them into the arms of the Fed.
If the Dollar violates chart support at the critical 50 day moving average near 76.40, the chart picture will turn decidedly bearish and could allow a huge wave of speculative long side liquidation, plus fresh short selling, which could usher in another crisis in the Dollar, as that could drive the greenback back down towards chart support below the 74 level.
Dollar bulls had better hope the Europeans fail to get their act together and botch the recapitalization plan.
Backing out and taking a bit of a longer dated look at the US Dollar on its Weekly Chart one can see that the market remains in a longer term BEARISH TREND. Until or unless the Dollar breaks through the 50% Fibonacci Retracement Level near the 81 level, the Dollar's trend is down.
"When misguided public opinion honors what is despicable and despises what is honorable, punishes virtue and rewards vice, encourages what is harmful and discourages what is useful, applauds falsehood and smothers truth under indifference or insult, a nation turns its back on progress and can be restored only by the terrible lessons of catastrophe." … Frederic Bastiat
Evil talks about tolerance only when it’s weak. When it gains the upper hand, its vanity always requires the destruction of the good and the innocent, because the example of good and innocent lives is an ongoing witness against it. So it always has been. So it always will be. And America has no special immunity to becoming an enemy of its own founding beliefs about human freedom, human dignity, the limited power of the state, and the sovereignty of God. – Archbishop Chaput
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Friday, October 14, 2011
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