Wednesday, February 20, 2008

Entry 2/20/07

I would like to make one interesting comment for today. The environment we are in is very interesting for the dollar. Specifically the USD/JPY. With slow growth and perceived inflation it appears the dollar has been range bound for sometime. On the monthly chart it appears a rally would be in order, based of support levels. However, of the two lower BB (1st and 2nd Deviation) prices have reached outside the 2nd deviation BB. One can argue it is only a temporary whipsaw and is still in an overall downtrend, and considering there was not a full close below the 2nd lower BB, and as the bands continue to expand. I would have to agree that in a macro fundamental sense the dollar is indeed still in a downtrend (persistent financial sector problems). However for the bearish argument to hold there needs to be a significant short term rally at least up to the lower first standard deviation BB. However again, the bulls will argue based of the monthly chart there has never been a full out close when the lower second BB was pierced over the past 11 years. If the bearish argument were to hold, all this sideways trading should lead up to a significant rally followed by a short. Now, the direction of the breakout in my opinion can come either way before a significant rally. On an overall fundamental standpoint, a breakout to the downside to find lower support before rallying makes more sense. But, with recent inflation data, if all other economic/finance conditions remain some what static or are priced in, the breakout can very well be to the upside.

Then there is also the theory of the BOJ/Ministry of Finance of Japan.

The BOJ/Ministry of Finance will maintain the currency pair above 105 to insure somewhat healthy exports. For short term bears this means they will be shorting on every lower high to support of around 105 before, being bullish.

I will omit any consideration to bargain hunters rallying to save the as of yet.
1. Because economic conditions are still quite unclear
2. No clear trend has been established in the short term.

If one is bearish overall for the economy and financial markets for this year, one will expect the dollar to end around the same levels as they are now or lower. But if economic conditions and sentiment can substantiate a short term rally within this overall downward trend. The dollar may end up range bound below the rallied inflection point. But it is in my opinion that the worst of the financial news is to come so the latter scenario is more likely, unless I am over estimating the speed of the currency markets.

Overall I am bearish on the dollar for this year. But may expect a short term rally to 110 to 111 that make occur from improved economic conditions or tied to possible inflationary environment to come from all the recent Fed Rate cuts. This rally may occur possibly start somewhere in the second quarter and go into the 3rd quarter).

The reason why I am not considering the technical bullish argument is because fundamentals do not warrant a rally. If housing, sub prime, credit markets, GDP growth can all bounce at once, to me obviously the bullish argument would be more probable. However this is not the case.

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