The Resurrection Of The Dollar
Part II
Sol Palha & Alan Lunt
Our lives improve only when we take chances -- and the first and most difficult risk we can take is to be honest with ourselves.
Walter Anderson American Trainer, Author
The dollar after dipping below 85 in January quickly rallied to about 88 on the index only to start pulling back as many traders decided to book their profits. Look at our previous article The Resurrection of the Dollar .
First of all notice that the dollar has only broken one of its downtrend lines. The second downtrend line is acting as tough resistance. It is only to be expected that after breaking the first downtrend line it would run into some resistance as the weak hands panicked when it approached the second downtrend line and locked in their profits.
Also notice that even though we took out the January lows on an intra day basis we did not do so on a closing basis. In fact the index ended closing up on the day, a potentially very bullish sign. Another very interesting factor is the positive divergence we see on the macds. Even though we closed lower intra day the macds put in higher lows, which illustrate that the dollar is building strength internally and that the big players are most likely using these pull backs to take additional long positions.
So we think we will see additional volatility as the dollar bounces up and down, however once it breaks past the second down trend line, we should see some fast upward action and then a mini pull back to the second down trend line which will now become support.
This type of trading would be categorized in the high-risk area. As with any form of investing, the higher the gains the more severe the pain, nothing great ever comes easy.
Lets look at some of the reasons why the dollar is set to rally. Most of these reasons have nothing to do with the fundamental nature of the dollar. If we were to rely on fundamental data only. The Dow Jones should be below 7000 and the NASDAQ should not even exist.
1) Most of all the strong currencies are extremely overbought. I will illustrate this point by putting up several charts
2) Many businesses in countries whose currency has appreciated strongly against the US dollar have had only one tool at their disposal to help them through this tough time. That tool was to hedge their bets by shorting the dollar. To be able to export to the US they have been unable to raise their prices and probably on many occasions have had to drop them.
3) One of the most important reasons is that almost everyone in Town thinks that the US dollar is going and should go to hell. They are all playing the easy trade, short the dollar go long the Euro.
The South African Rand after basically doubling against the US has started to pull back. it had completely over extended itself. I believe that it will correct a bit more and then trade side ways. At that point it will be easier to tell if the Rand will continue going up or carry on correcting.
The Canadian dollar has already broken its up trend line, however it might poke its head above the line once more. Short to mid term it is going to correct more before it takes of again
Swiss Franc also has over extended itself and is due for breather any moment.
The OZ dollar has already broken the second up trend line and looks ripe for consolidation.
Conclusion
All the currencies have basically had a very serious bullish run and have over extended themselves, therefore on a technical basis and psychological basis and this has nothing to do with fundamentals, therefore in all likelihood the dollar should start to rally soon. This rally won’t spell the end of the dollars problems. It is only going to be a small reprieve, the long-term trend is still down but great profits can be made playing the short and mid term trends.
Take a chance! All life is a chance. The man who goes the furthest is generally the one who is willing to do and dare. The “sure thing” boat never gets far from shore
Dale Carnegie 1888-1955, American Author, Trainer
The US Dollar
Alan Lunt
Reading through the newspapers I have found that there are indeed companies that have hedged the US dollars decline. What these companies fear most is that their contracts will go against them, and hence their suppliers will be forced to accept lower payouts, as position trading the currency with little or no expertise has proved disastrous in the past. These contracts have a year or more on them so unwinding is difficult to say the least.
The last time New Zealand’s currency strengthened I was farming and knew little of the futures market. I went to a seminar at Ruakura ( our national agricultural research station ) and heard about futures on wool and dairy products. It all sounded like a big mystery and I was not about to put my hard won money at risk in THAT market. So as an individual I was content to sit back and let the companies and boards do the hard yards. What happened was that when our currency started to decline and the products were worth more on the world market in NZ dollars, I never saw the increase in value until the contracts expired that the various industries had put in place.
Not if, but when the $US rallies, as it will short term, everyone will convince themselves that they were right not to take large positions. They will miss the opportunity to go short the dollar again. When you are in an industry where it takes years to developed markets and products currency swings can destroy the innovation. Producers are loath to take risks of magnitude.
For sure there are companies that are short the dollar, and they will cover some of the risks, but they will not cover all of the risk for the amount of years that it takes currencies to cycle. Producers and suppliers will at some stage take a huge financial hit. We are almost at that stage now after just 3 years of the US dollar bear as is born out in Fontura's earns forecasts for next year. ( Fontura is our largest dairy company). Payouts could be down by about 40% to the dairy farmer.
The timing is about right for a short squeeze. Contracts with 3 years on them are coming due and the longs will not want to part with their money. The charts are showing a positive divergence. When the dollar rallies from here there will be a mass exodus by the shorts who can exit, fearing that they will loose their gains, an exodus that will drive the dollar higher. Those that cannot, or will not exit, will do so at the first available opportunity that comes along in the future. Then the dollar will be toast.
27.01.2004
1.45pm
Forestry products company Carter Holt Harvey (CHH) is likely to post a net loss after tax of $668 million for last year, says broking firm Forsyth Barr. CHH is due to release its result for the year ended December 31 on Thursday and the market is rife with speculation on what the figures will be. Forsyth Barr analyst John Cairns said CHH would report the net loss after a $900 million write-down in the value of its forest estate.
Is Greenspan correct when he talks about companies and countries hedging to save themselves? Many of our largest companies are just riding the storm, they cannot afford to cover their entire asset base, what they are doing is covering production from year to year. All annual covering does is delay the eventual outcome. From what I see hedging has not, and will not, save us in the long run. It is all hot air. If by hedging he means Central Bank intervention into the market to trash their own currency then all I would say is that it hasn't helped the Yen greatly. All intervention does is transfer the risk from a few to the masses. Intervention is just another derivative. Intervention is what got us here in the first place.
© 2004 Sol Palha
TACTICAL INVESTOR
www.tacticalinvestor.com
info@tacticalinvestor.com
19 February 2004
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