Thomas
DeChastelain
Memorial Archives

A Contrarian View On The Dollar
posted Oct 20, 2004 at 12:10AM

The consensus amongst speculative interests is that the dollar is dead and that a major new down leg is underway.

In the perverse logic of the markets whenever there is a consensus amongst speculators, it is often true that we are approaching a point where the market likes to unleash some nasty surprises.

Will the dollar go up? I do not know. Can it go up? Definitely. The rationale for such a move would be based on:

a) long bonds rolling over. Every major countertrend rally in the USD has been accompanied by falling bond prices (and thus higher yields)

b) oil rolling over. I know oil looks like a juggernaut, but there is historical precedent here. Oil tends to lag gold in reaching important trading peaks by 11 months. If the pattern holds true then oil would start correcting in early November, although one does have to give a bit of leeway in either direction

As well, the suspicion that China has been hoarding oil and is hiding a aupply overhang is starting to get mentioned more and more. For now suspicion is all that exists, but if it got confirmed...

c) China commodity consumption slows. The collpase of the copper price may be more than just "profit-taking".
The sudden drop in Chinese demand may be a harbinger of things to come

General Motors reported lowering demand for autos in China: another dent in the China growth story.


I also found it interesting that for the first time since the Jurrasic Era, China actually reported a trade deficit with the US, not a surplus. True the deficit is small. It may just be a hiccup...but it may be something else.

Now to look at some charts


Bond/Dollar Ratio



Bonds Daily



Bonds Weekly



No obvious sell signals as of yet but the plethora of negative divergences suggest the potential for bonds rolling over is definitely in existance


Dollar Daily



Dollar Weekly



Yes the bears have driven the dollar down below key 87 support levels, but it has been hard work even with almost every other variable (oil, geo-politics, rising bonds election uncertainty etc) in thier favour.

The overlapping nature of the down-move is characteristic of corrective not impulsive moves

The latest COT Report also supports the bullish case for the dollar


Oil



Copper



Summary

Again I do not know what the USD will do. Given all of the above on can build a very good case that in the next two weeks the USD will retest the lows at 85 coincident with topping in oil and recovery highs in gold.

For myself I am mostly cash. I am keeping a close eye on gold stocks and am ready to jump in on a short term trade basis if the tea-leaves fall into place. I am in no rush.

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