# US Dollar Index - DX



## CanOz

I thought i would start this thread to help some of us newer FX traders identify trend changes/continuation patterns in the major currency.

To me, this is another pivotal moment in the DX which could define the trend for the next few weeks, even months with the passing of the bailout package. The USD could come under pressure now. Technically the chart looks oversold and depending on what happens next week we could be seeing some bearish divergence.

Anyone care to comment on the direction of the USD in order to help us take a view on the markets for coming week?

Cheers,


CanOz


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## Lucky_Country

Interesting time for the US$ personal thoughts are the 80 point marky on the index is known resistance once that is reached whih it has been the dollar will tumble.
Now is a good time to enter gold and other commodities as the dollar pulls back.


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## CanOz

Lucky_Country said:


> Interesting time for the US$ personal thoughts are the 80 point marky on the index is known resistance once that is reached whih it has been the dollar will tumble.
> Now is a good time to enter gold and other commodities as the dollar pulls back.




Interesting times indeed. Commodities i feel will still continue to decline as global demand softens, but what effect a declininig dollar will have on them i'm not sure. Possibly the decline in commodities may not be as swift as the first leg down. I'll try and post a chart of the CRB later.

The other thing not shown on this chart are the bollinger bands, FWIW a pullback is usually, but not always preceded by a touch of the upper bolli, but no such event has occured. This leads me to think that some consolidation at these levels may happen before a trend emmerges.

Anything can happen obviously, but we're trying to anticipate the possibilities.

Cheers,


CanOz


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## CanOz

Futher to the reference to commodity prices, which will influence AUD and CAD. Here is a chart of the Continuous Commodity Index, which clearly shows a new low. Trend remains down but we could see a bounce, which with dollar weakness could be quite swift.

Cheers,


CanOz


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## Lucky_Country

Low commodity prices are also accelerating production declines with marginal producers being hit.This should offset some of the lower demand scenario.
What is interesting is the weakness of the AUD which is helping AUS exporters and the talk of interest rate cuts next weak could also weaken futher against the USD.
Will the FED be cutting interest rates soon is another quandry.


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## CanOz

Lucky_Country said:


> Low commodity prices are also accelerating production declines with marginal producers being hit.This should offset some of the lower demand scenario.
> What is interesting is the weakness of the AUD which is helping AUS exporters and the talk of interest rate cuts next weak could also weaken futher against the USD.
> Will the FED be cutting interest rates soon is another quandry.




Great points IJH. I'm wondering too about the truth of the coordinated rate cut scenario.....it could be a volitile week for currencies, and it may take a few days for the main pairs against the dollar to find some direction. Have the markets already priced some of that in?

Cheers,


CanOz


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## CAB SAV

I also can see US$ heading down and an wondering if this might stop oil slide or even push oil up which would be another disaster for the yanks?


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## CanOz

Oil looks certain to test the recents lows first though. This week should revela many things. Everything is at interesting levels again.

Cheers,


CanOz


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## Lucky_Country

Well the oil scenario is a very interesting one. 
The FED wants to cut rates with the little room it has left to do so but doesnt want inflation. A rising USD will reignite inflation via oil but the FED wants to stoke the economy and get out of the ressesion imo.


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## explod

I do not see a lot of strength coming for commodities.  Consumer spending is falling in all industrialised countires which will dampen demand for this sector.

I have always seen currencies and gold as more related to the financial sector.   GOLD and SILVER not within commodities.  Looked at this way make the dynamics of gold and the US dollar easier to understand.

The US dollar index will still maintain some support, at least in the short term due to fear and the recent new knowledge to the general that Europe is also in big financial trouble.   I think the Aussie has been oversold and its return to strength will mark the next downleg of the US$ index.   Then US gold will rise.


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## CanOz

This morning there is a flight from risk as the Yen gains against the buck.

US futs are getting killed already. Most currencies gapped open this morning, taking with it my stop on the swissy that i left open (slept in too late). Good lesson learned there.

This only the second time i can remember such a gap open. Is this the final capitulation of the dollar, or a continuation of recent strength? I think i'll wait to see how this plays out today before entering any more trades.

Cheers,


CanOz


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## Uncle Festivus

Apparently they are printing special notes to use with the $700B bail out -


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## CanOz

Wow, we'e seeing a serious flight to "safety" today and the Dollar is looking pretty bullish again. This could continue, 10 yr treasuries are rising. 

Cheers,

CanOz


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## CanOz

Nice flag to re test. Lots of opportunities in all the pairs lately. I think i need some holidays just to watch the screen all day!

Good trading.

CanOz


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## CanOz

Looking for a pullback in the DX and the related pairs this week. I'm only trading the AUDJPY for the moment, and I'll only take trades with the trend in this environment. The decline has certainly been swift.

Heres a couple of charts for Y'all.

Another week of volatility?

Cheers,


CanOz


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## Uncle Festivus

Hi CanOz,
Does MF Global have a DX contract to trade? Does anybody?


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## CanOz

Yeah, the DX future contract can be traded, but I'm not 100% sure on what exchange at the moment. I'll have a look for you on IB.

Heres the latest chart with the DX pulling back nicely. This may give some things a bounce, gold, oil etc. The question is, how quick to these mugs that got into treasuries want to get out again? 

This is a great spectator sport!

cheers,


CanOz


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## arco

.

I know you can trade DX on some of the MT4 brokers platforms.

However, you would need to check with a few of the reliable brokers to see which one has it available.

rgds - arco


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## BentRod

Sure is boring with all the whipsawing in the FX market lately.

A Budgie Man special on 4 Hourly.....lets hope for a clean break and a bit of impulsing!

Given the DX is almost the EURO inverse, that has a bearish formation also, might try to add a few with tight stops if it breaks.


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## BentRod

Uncle Festivus said:


> Hi CanOz,
> Does MF Global have a DX contract to trade? Does anybody?




IB should have the futs contract otherwise just trade the Euro.


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## CanOz

Anyone feel like trading against the DX breakout?

Just get on with the trend will you!

Cheers,


CanOz


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## CanOz

Anyone get the feeling something big is about to happen with the markets? This coiling is getting itself into a real squeeze now!

Cheers,


CanOz


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## >Apocalypto<

so boys who is technically bearish on the USD???


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## >Apocalypto<

Uncle Festivus said:


> Hi CanOz,
> Does MF Global have a DX contract to trade? Does anybody?




You trade futures over it UF. I know xpresstrade offered it. Can't remember if it was called dx though. I do know they offer the USD INDEX.


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## CanOz

>Apocalypto< said:


> so boys who is technically bearish on the USD???




I wish i could be bearish on it i really do, but the chart still says bullish....a real conflict at the moment.

Cheers,


COz


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## CanOz

Well this has certainly added to my bullishness on the USD. Check out the 30 min chart of the ES mini.....patterns everywhere, every pair, but what will happen...no doubt i'll be asleep

Cheers,

CanOz
I'll post this on the S&P thread as well but everthing is correlated to the equity markets now anyway.


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## CanOz

The DX has broken out of its triangle, and a move to the last high is immenent and a possible advance towards the measured move of 90.00. With this commodity prices will slide further, and the AUD pairs. 

Could this be the last advance we see for the USD for a while? Lots of pundits calling for a rally in US Equities, and therfore an exit from Treasuries etc. Interesting to note as well that Treasuries didn't trade yesterday, but we still saw funds going into USD, not sure what that means

Cheers,

CanOz


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## BentRod

>Apocalypto< said:


> so boys who is technically bearish on the USD???




I'm the same as Cannie, can't see any reason to get bullish.

Personally I think USD is in a bullmarket and next stop is Parity with the Euro. 

Might take a while but can't see why it won't get there within a couple of years.

PS...WB....where the hell have you been Joe????


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## CanOz

Double top on the DX. Looks like we could see an unwinding of USD postions now?

Hope so, theres plenty of pairs with bullish patterns now.

Cheers,


CanOz


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## >Apocalypto<

o man, thank god it's only demo cuz I have been smashed on now 4 attempts to short the usd!   

So Can what do you think of the chart? (it's four hour)

1 do we have a double topping pattern that needs a lower high to signal a break of the trend line?

2 this will do a higher low to test and break resistance. it's in a very nice bullish cont pattern. Plus the golden rule of follow the trend!

It's a hard one as both arguments look good. this rally has written off bad data and rate cuts that shows how strong fear is!!!!! CASH is KING! viva T notes and bonds!

cheers


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## CanOz

What do you reckon mate, a sell the news gap up on the DX?

Sorry no time ot post the chart, try this link.http://futuresource.quote.com/charts/charts.jsp?s=DX%20Z8&o=&a=D&z=800x550&d=LOW&b=CANDLE&st=BOLL(20%2C2)%3BMA(4%2C9%2C18)%3BSTO(14%2C3)%3BVOI(1%2C1)%3B

Cheers,


CanOz


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## sinner

Check out the MACD on that baby...

From

http://www.gold-eagle.com/editorials_08/orlandini111608.html

I was gonna paste the goldbugs chart to go with it, but all you really have to do is imagine the exact inversion of the above


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## CanOz

You would think when she lets go its going to unwind like a twisted rubber band hey! 

Still consolidating though.

Cheers,

CanOz


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## sinner

More rallying to come?

Between Mish's anti de-coupling stance and this guy reckoning further upward pressure due to ECB rate cuts...

http://www.kitco.com/ind/Radomski/nov172008.html

Worth a read




This is the housing debacle all over again. Everyone is going up and I'm sitting on the sidelines! So tempted to go out and put a few '000s into some USD.


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## >Apocalypto<

still sitting in it's pattern.

had a test to the low and to the high. a real stale mate right now with the underlying pattern being bullish.

watching with interest.

can I am more of a short to med term bear then a bull...........


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## >Apocalypto<

Can what you think a fourth fail at that resistance point is this it for the USD on the short term?

I am starting to think so. Need to see a break of the trend line come next week and I think it will start to move down.

Cheers......


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## Whiskers

CanOz said:


> You would think *when she lets go its going to unwind like a twisted rubber band hey*!
> 
> Still consolidating though.
> 
> Cheers,
> 
> CanOz




Yes... and next week could well tell.

If the weekly candle finishes below 86.425 (if my maths is correct)... an 'Evening Star'... it'll be curtains for quite a long time.

That is supported by a Morning Star on a number of currencies against the USD for a few weeks. But just when they started to take off they got surpressed... er, PPT'd, minipulated.


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## >Apocalypto<

Whiskers said:


> Yes... and next week could well tell.
> 
> If the weekly candle finishes below 86.425 (if my maths is correct)... an 'Evening Star'... it'll be curtains for quite a long time.
> 
> That is supported by a Morning Star on a number of currencies against the USD for a few weeks. But just when they started to take off they got surpressed... er, PPT'd, minipulated.




i would not hold all your hopes on a morning start whiskers they fail as well mate.


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## Whiskers

>Apocalypto< said:


> i would not hold all your hopes on a *morning start *whiskers they fail as well mate.




No, I'm not the best off the mark in the morning either. Will often drop off for a cat nap at smoko if up too early 

But, yes there's been a lot of Morning Stars lately, some of which have failed relatively quickly... but I've found Evening Stars to be more reliable.


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## >Apocalypto<

Whiskers said:


> No, I'm not the best off the mark in the morning either. Will often drop off for a cat nap at smoko if up too early
> 
> But, yes there's been a lot of Morning Stars lately, some of which have failed relatively quickly... but I've found Evening Stars to be more reliable.




some great writing on my part!!!  take no notice.

anyway seems both the pattern on the chart and candle reversals you saw have come good on the open gap. 

so see how it holds on the open of the European markets.


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## CanOz

Well the DX is finally moving again. Can we look for a move back to support and the start of the wedge.....or whatever?

Cheers,


CanOz


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## chops_a_must

Looks like the target lines up with support at about 77 there Can.


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## >Apocalypto<

the pattern came good trend line broke, new direction in swing. 

some short term supoort levels I see in the very near term. 

took a while but we got it..............


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## sinner

A longer term look provides some interesting insights...

Can this "rally" bring the USDX back to 2005 highs? The longer term indicators provide some room for that movement, but things look grim for anything higher than that before they begin to push downwards again.

Unless demand for USD remains so high as to break through these (as yet) untouched longer term indicators and set up new cycles as it has with the shorter term (witness MACD in above charts) this could be the beginning of the end for this "rally".

This index is rapidly approaching the tight 2005 support/resistance window...


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## CanOz

I hate to be the perma bear here too but i think we'll see more weakness in the S&P and then snap higher on the DX, after all this is still in a medium term uptrend.

Sorry i haven't posted for a while, my Dubai proxy quit (no credit maybe?) and i couldn't get online without it until tonight. Oh i did i mention i had my laptop and passport stolen too, not a great couple of weeks!

Cheers,


CanOz


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## BentRod

> Sorry i haven't posted for a while, my Dubai proxy quit (no credit maybe?) and i couldn't get online without it until tonight. Oh i did i mention i had my laptop and passport stolen too, not a great couple of weeks!




Wondered where you were Can, sorry to hear about the passport- what a hassle!


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## IFocus

CanOz said:


> I hate to be the perma bear here too but i think we'll see more weakness in the S&P and then snap higher on the DX, after all this is still in a medium term uptrend.
> 
> Sorry i haven't posted for a while, my Dubai proxy quit (no credit maybe?) and i couldn't get online without it until tonight. Oh i did i mention i had my laptop and passport stolen too, not a great couple of weeks!
> 
> Cheers,
> 
> 
> CanOz




Can must be a real pain in the A*se, hope all is now well


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## >Apocalypto<

Sorry to hear that can.......

Boys I have made a technical case for why i think the USD is starting long term bull market. It's based on technicals only and only supported by what i can see on the chart.

I have not posted it here cuz I am not interested in what will come into the thread from all the report cut and pastes.

If you're interested to have a look and a read, the link is below.

http://www.forexfactory.com/showthread.php?t=136330

cheers


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## Indie

>Apocalypto< said:


> Sorry to hear that can.......
> 
> Boys I have made a technical case for why i think the USD is starting long term bull market. It's based on technicals only and only supported by what i can see on the chart.
> 
> I have not posted it here cuz I am not interested in what will come into the thread from all the report cut and pastes.
> 
> If you're interested to have a look and a read, the link is below.
> 
> http://www.forexfactory.com/showthread.php?t=136330
> 
> cheers





I'm not chartist but I think the fundaments support your argument. Saving rates in the US are rising dramatically so the reliance on foreign capital going forward will be less and less. It's also important to remember most other central banks will try to keep their currency down against the dollar through competitive devaluation and the fact that many of them have to print even more than the FED because their economies are in even worse shape than the US. Long term bull is on the cards until we hit deflationary bottom.


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## explod

Well I think the last two posts are both wrong.   On the technical it has broken down and looks like heading south much faster than it went north over the last few months.   And the fundamental for a strong US dollar are growing weaker by every bit of news coming out from Wall Street.   The fed are tipped to drop the cash rate by a further 50 basis points in the next day or so, which always weakens the US dollar.

I have no gut feel, it is just my take on the facts as I see them.   Been often wrong though.


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## Indie

explod said:


> Well I think the last two posts are both wrong.   On the technical it has broken down and looks like heading south much faster than it went north over the last few months.   And the fundamental for a strong US dollar are growing weaker by every bit of news coming out from Wall Street.   The fed are tipped to drop the cash rate by a further 50 basis points in the next day or so, which always weakens the US dollar.
> 
> I have no gut feel, it is just my take on the facts as I see them.   Been often wrong though.




Naturally I don't have a crystal ball either, but I'm fairly certain EURO at 1.38 has a 75bpt cut by the FED priced into it - this is where I start shorting it. What I mean is I think this move down had more to do with interest rate differentials than bad news coming out of the US especially since the BOE hinted they may not cut again, which is just wishful thinking. I'm banking on more bad news because so far that has been bullish for USD and YEN, so I'm long these two against AUD and EURO.


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## bankit

explod; Well I think the last two posts are both wrong. quote said:
			
		

> I have to agree Explod. The chart below is showing all the signs of a high being in place.
> 
> Bankit


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## >Apocalypto<

food for thought boys.

Would like to see support and a bounce from 75- 85 for good signs a USD bull is beginning.

USD Monthly chart


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## BentRod

USDX getting creamed.


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## Indie

Ouch!


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## Naked shorts

BentRod said:


> USDX getting creamed.




Must be the IR cuts. I wonder if this is the start of the USD tank


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## explod

Naked shorts said:


> Must be the IR cuts. I wonder if this is the start of the USD tank




It started to tank days ago and I tried to warn you all yesterday.

Just a little fundamental and some technical can take you a long way.  Look out above on the gold threads.


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## BentRod

Naked shorts said:


> Must be the IR cuts. I wonder if this is the start of the USD tank




Seems possible...can't ignore that impulsive price action the last few days.


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## Indie

If the downtrend continues when the market starts to tank again then I'll believe it. But I did lose a of ground last night in the markets.


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## bankit

Hi All,

Well the USD went through my first support at around 82 ¢ like butter. 

Looks as though a major top is now in place and this is a serious move down as evidenced in the strong move up in gold last night.

Bankit


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## sinner

Guys, 

I have a bad feeling about what is coming!

Not too relevant to this thread but today I exited my longs in EWH and FXI (international) and used the proceeds to long on IAU (ASX) and some more gold.

50 and 100 day MAs have been creamed. As I write this USDX sitting at 80.253 (with last trade at 79.825 and previous close of 77.736), with the 200-day MA beginning a downward turn at high 77s low 78s. Not a lot of room left to feel optimistic.

I can see both sides of the coin in terms of USD bull and bear, but fear the worst. It is worth noting some huge gapping down from 83 to 82 and smaller gaps just above 80, as gaps tend to be filled one way or another, so there is some hope for USD bulls.


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## sinner

Just watching Bloomberg right now, they are doing a piece on the USD, the reporter lady is indicating all the traders and analysts she is speaking to TODAY are revising their USD forecast to the downside.

Reasons given lack of a Fed quantitative easy TARGET as well as the fact this years deleveraging is most likely finished up (although would be mindful to consider it will probably begin again next year with the next round of hedge fund redemption calls).

She also mentions there is strong pressure on the Bank of Japan to devalue JPY against the USD, something about everyone needing 100:1 JPY:USD to break even! We will see if they have the power to stop the carry trade unwinding, another Bloomberg article I read on here said BoJ was "powerless" to stop what is happening!


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## Indie

Even I'm shorting now....even against the NZD.


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## BentRod

> just watching Bloomberg right now, they are doing a piece on the USD, the reporter lady is indicating all the traders and analysts she is speaking to TODAY are revising their USD forecast to the downside.




Geez...that makes me want to short some more rather than do anything else.:


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## BentRod

Indie said:


> Even I'm shorting now....even against the NZD.




Careful, use wide stops/smaller positions at least.


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## sinner

BentRod said:


> Geez...that makes me want to short some more rather than do anything else.:




Hi Bent, like I said I can see it both ways, no decision or choice on my part just trying to bring some info to the table.


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## bankit

Hi All,

Peter Schiff's latest episode on the real truth about the USD.

http://au.youtube.com/watch?v=gapZx0bJiRU&feature=related

Bankit


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## CanOz

Hey folks, back with a new Laptop, passport and proxy...got kicked off my old proxy...

Those have been some nice moves in the USD pairs lately hey! Watch out for thin markets this week again.

Good Trading.

CanOz


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## BentRod

Welcome back Buddy



> Hey folks, back with a new Laptop, passport and proxy...got kicked off my old proxy...




Why do you have to use a Proxy?
Is this site on a black list?



> Those have been some nice moves in the USD pairs lately hey! Watch out for thin markets this week again.




Some strange moves for Swissie and Euro that is for sure.
Not quite sure what to make of it.


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## Stormin_Norman

my feeling is two fold:

lower market liquidity (more price movements).

large players neutralising short positions for the end of year.


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## CanOz

BentRod said:


> Why do you have to use a Proxy?
> Is this site on a black list?




Yes it must be on a bad list somewhere. It was fine during the O Games. I use a proxy from Saudi. Sometimes it goes down though.

Great moves in the USD pairs, i'm just getting the stops to even ASAP.

Agree totally with Stormin's comments, thin markets and year end will contribute to this volitility until year end.

Cheers,


CanOz


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## CanOz

Looks like the DX might be rolling over now. If the S&P has a good night we could see a big drop.

Cheers,


CanOz


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## BentRod

> Looks like the DX might be rolling over now. If the S&P has a good night we could see a big drop.




Be interesting to see what happens mate, surely we are due for a bit of short covering anyway???


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## BentRod

sinner said:


> Hi Bent, like I said I can see it both ways, no decision or choice on my part just trying to bring some info to the table.




Sinner......just looking back at the charts, that Bloomberg story marked the exact bottom...LOL


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## MARKETWAVES

*Us Dollar*

 Usd/Chf

Welcome  to  the  "* Obama  Rally "* !

 Price-action has  been steadily rising 
from just before the  Inauguration .....
----------------------------------------
   2nd Target....... has  been reached .......

--------------------------------------------
 Elliott Waves  Formations at Work
--------------------------------------------


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## CanOz

Rolled!

What a night, the S&P rallied as the DX plunged.

CanOz


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## sinner

Hi guys,

Let's take a long term look again, charts thanks to fxstreet again.

The first thing to note is a complete lack of the characteristic lack of quiet trendish movements that previously characterised these charts. Traders have been gifted with extreme volatility!

All those participating in the yen carry trade and similar shenanigans are getting chewed out!

Strong resistance at the 0.88 price level means we have not seen a reversal of the long term trend yet (still a lower high). But the stochastic has bottomed and turned nicely while the MACD has turned up for another possible crossover of the trigger, with the price gaining good support from the 100MA (higher low).

The bullish divergence I was looking for was resistance from the 200EMA after the price broke down through it, but it was sliced through with a bearish bounce off the 100EMA. 

So the picture is there for a possible long term trend reversal, as others here have posited is their opinion already. Looking for a higher high (90 looks like a possibility on the now widened boll band), stochastic to remain above 0.2, MACD to remain above 1.5 (with an eye to the trigger) and for a further reduction to risk the 200MA should stop trending down. We saw a tiny bit of this after it bounced off 0.82, and it needs to continue now.

Frankly a small retracement to 0.82 followed by a bounce to the top of the boll band looks more likely than a drop to 0.78 from here!

This is why I think it is very important to examine the long term chart, sometimes these technical indicators can provide insight the fundamental situation. Imagine if you had longed the bottoming MACD crossover in late 2007 at 0.71!!!


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## CanOz

Great post on the bigger picture Sinner, thanks for the longer term charts.

CanOz


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## acetrader

CanOz said:


> I thought i would start this thread to help some of us newer FX traders identify trend changes/continuation patterns in the major currency.
> 
> To me, this is another pivotal moment in the DX which could define the trend for the next few weeks, even months with the passing of the bailout package. The USD could come under pressure now. Technically the chart looks oversold and depending on what happens next week we could be seeing some bearish divergence.
> 
> Anyone care to comment on the direction of the USD in order to help us take a view on the markets for coming week?
> 
> Cheers,
> CanOz




Usually i have to force myself not to have any opinion about the market especially about its direction. After years of try and trial I find only one true opinion that is the market itself. When you scroll through the stock chart, it looks like a painting roll, it seems somthing had happend and waiting for our viewing, but it is just an illusion. If you are an analyst you have to have some opinions and give to your clients that is you paid for. But as a trader you have little advantage. you don't have to have opinion. You just prepare your plan A and plan B and plan C and know when to switch. So I believe the liquid market is just like giant river. it goes where it likes to go we just need to find a way to enjoy the ride.
Good Luck!


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## CanOz

acetrader said:


> Usually i have to force myself not to have any opinion about the market especially about its direction. After years of try and trial I find only one true opinion that is the market itself. When you scroll through the stock chart, it looks like a painting roll, it seems somthing had happend and waiting for our viewing, but it is just an illusion. If you are an analyst you have to have some opinions and give to your clients that is you paid for. But as a trader you have little advantage. you don't have to have opinion. You just prepare your plan A and plan B and plan C and know when to switch. So I believe the liquid market is just like giant river. it goes where it likes to go we just need to find a way to enjoy the ride.
> Good Luck!




Nice analogy Ace. Generally i try to anticipate moves in all three directions (up, down and sideways) but its good to have an eye on the bigger trend, to keep it in the back of your mind, IMO.

The DX for example, when it was at the trend line, i was alert for a potential trend change on the other pairs. Some of the other pairs had no support/resistance that was obvious, the DX can provide an idea where trends may stall, or resume.

Cheers,


CanOz


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## acetrader

CanOz said:


> The DX for example, when it was at the trend line, i was alert for a potential trend change on the other pairs. Some of the other pairs had no support/resistance that was obvious, the DX can provide an idea where trends may stall, or resume.
> Cheers,
> CanOz




Just the opposite for me. It may sounds crazy or stupid but it is true. I trade EUR/USD and some AUD/USD, but never refer to the US Dollar Index except for the first few months of my forex trading. 

Simpler is better. Since the the index is derived from those pairs I will watch closely what I'm trading and find my hints there. I have same opinion towards indicators. the less the better. no macd, no rsi, no bb just price bar and S/R lines. I'm not sure if my way is the best way of trading but I'm sure it is  profitable and something I can understand.


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## CanOz

Heres a 1 Hr chart of the DXH9, is that a H&S pattern i see? 

Cheers,


CanOz


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## CanOz

The DX is into quite a rebound. Risk is being averted again. 

To me, a bear market rallies on Monday and falls on Friday....is this another bear market rally faltering now? Speaking in terms of the equity markets and their impact on currencies.

CanOz


----------



## Whiskers

Quite a few H&S's on the DX Can.

I got a little one on the 5 min... should hold it up just about long enough for my AUDUSD to reach it's target.


----------



## BentRod

DXY looks like it is coiling on the 4H.

I have an upside bias but don't like how it is sitting underneath the highs, would look better for a break if sitting on top IMO.

Seems like another interesting week ahead whichever way it breaks.


----------



## Whiskers

I'm leaning towards the south Bent Rod. 

Haven't long tuned in to my charts... it's zig zaging down a bit the last hour or so, but I wouldn't be surprised if it whipsawed up a bit sometime soon before plunging south.


----------



## CanOz

Wouldn't you just love to witness a total breakdown of the DX? Huuumph, i don't think so...looking for a bounce but still long the EUR.

Cheers,


CanOz


----------



## CanOz

If this isn't a mass exit of the dollar then what is?


----------



## sinner

CanOz said:


> Wouldn't you just love to witness a total breakdown of the DX? Huuumph, i don't think so...looking for a bounce but still long the EUR.




So in the end you got your wish :

88 was strong resistance and a breakdown from this point does not signify good things for the USD as it was the chance for it to break the longer term trend by making a higher high. Instead it made a (just) lower high.

My target is still 82 then 90, but those are some big moves to call while there is yet to be a higher high and we can only wait and see!

200EMA has turned up finally and the MACD which I mentioned in my last long term look on this thread looks very close to generating a buy signal, however if it does not cross the trigger this would be very very bearish.


----------



## Stormin_Norman

bank failures in america should help push it down a bit.

and the bond bubble busting.

and the fed printing money.

and the zodiac signs.


----------



## BentRod

Couldn't help but notice those gap fills with that price action Last Friday.

USDX looks like it filled to the pip on my charts.


----------



## >Apocalypto<

Dollar Index 4hour.......

I am seeing a small counter trend patter developing...

we have a bottom section creeping trend turn into the range we have now. This range has had two tests of the low completed. Forming a double bottom / higher low.

I see based of this a rally to, short target first yellow bow with a further target the second yellow box, that is little extended. I favor the mid area of these boxes with a resumption of the down trend.

If it breaks down off the current point then the idea is not valid any more. 

cheers


----------



## Lucky_Country

How low can the USD actually sink to ?

The strenght in the dollar has perplexed me surely it cant last and commodities will run on the downward spiral !


----------



## Stormin_Norman

Lucky_Country said:


> How low can the USD actually sink to ?
> 
> The strenght in the dollar has perplexed me surely it cant last and commodities will run on the downward spiral !




i think itll tail off as bond prices fall and the treasury starts selling to the fed (ie printing money).

watch gold if that happens.

btw, disappointing against spurs.


----------



## >Apocalypto<

>Apocalypto< said:


> Dollar Index 4hour.......
> 
> I am seeing a small counter trend patter developing...
> 
> we have a bottom section creeping trend turn into the range we have now. This range has had two tests of the low completed. Forming a double bottom / higher low.
> 
> I see based of this a rally to, short target first yellow bow with a further target the second yellow box, that is little extended. I favor the mid area of these boxes with a resumption of the down trend.
> 
> If it breaks down off the current point then the idea is not valid any more.
> 
> cheers




I got that really wrong!


----------



## Stormin_Norman

well printing money does throw a spanner in the works of how things are _meant _to work.


----------



## sinner

Hi guys,

Back with another long term USDX chart.

I already posted this but either a mod deleted it without telling me or my computer told me it posted without posting!

There is a negative divergence on the weekly USDX. The bounce off 200MA is bullish, admittedly.

This index managed to make a higher high (green line broken) on the weekly close but neither the RSI or 12,26,9 MACD managed to confirm this high.

Please see the below chart, comments appreciated.


----------



## CanOz

Looks good to me Sinner, love bearish divergence. Roll over you Bit**!

Good for mining stocks too!

Cheers,



CanOz


----------



## sinner

Well, she certainly rolled over!

Here is the next long term chart. Using this chart as an indicator for EU,GBP,AUD pairs and trading higher TF has been good, lots of whipsawing on the shorter.

Mostly ranging this week as you can see from the final candle.

Let's get this fiasco over and done with.


----------



## explod

sinner said:


> Well, she certainly rolled over!
> 
> Here is the next long term chart. Using this chart as an indicator for EU,GBP,AUD pairs and trading higher TF has been good, lots of whipsawing on the shorter.
> 
> Mostly ranging this week as you can see from the final candle.
> 
> Let's get this fiasco over and done with.




Looking very bearish now, double head and shoulders down to 72 a maybe a fair possibilty ??


----------



## CanOz

What are peoples thoughts on this bullish flag?

Some nice volume on the intraday lows too.

Cheers,


CanOz


----------



## Frank D

*USD Index *

Chart below should explain my view on the USD Index...


----------



## CanOz

DX displaying some strength, with strength in equities...


----------



## CanOz

From the Bloomy...



> Dollar Gains Show U.S. Leading Shift to Stocks: Chart of the Day
> 2013-03-15 04:00:00.6 GMT
> 
> 
> By David Wilson
> March 15 (Bloomberg) -- The dollar’s strength in the midst
> of a more stable financial system signals the U.S. will lead a
> worldwide shift toward stocks from bonds, according to Michael
> Hartnett, Bank of America Corp.’s chief investment strategist.
> The CHART OF THE DAY tracks the performance of the Dollar
> Index, a gauge of the U.S. currency’s value against those of six
> major trading partners, and a Bank of America index of global
> financial stress. Hartnett used a similar chart in a report
> yesterday.
> This year’s moves in the indicators helped bring “a
> decisive end” to a relationship between them that developed
> before the 2008 financial crisis and pointed to deflation, the
> New York-based strategist wrote. The Dollar Index has risen as
> much as 3.9 percent, while the Bank of America index has shown
> below-normal stress levels all year.
> “The leadership of the U.S. in the Great Rotation remains
> ongoing” because of the decoupling, the report said. Hartnett
> was referring to a return to more normal economic growth and
> interest rates, which prompts investors to add equities and
> reduce debt holdings.
> Stocks have room to advance, Hartnett wrote, in the absence
> of surging interest rates or falling corporate profit margins. A
> “sellers’ strike” by investors concerned about missing a rally
> may help lift share prices, he added.
> MSCI Inc.’s broadest stock-market gauge, the All-Country
> World Index, gained 6.5 percent for the year through yesterday.
> U.S. shares were even more rewarding, as the Standard & Poor’s
> 500 Index climbed 9.6 percent and approached a record set in
> October 2007.
> 
> For Related News and Information:
> BofA Global Financial Stress Index: GFSI <Index> DES <GO>
> MSCI-S&P 500 comparison: MXWD <Index> COMP YTD SPX <GO>
> Dollar Index intraday movers: DXY <GO>
> U.S. stock strategy: TNI USS STRATEGY <GO>
> Stock-market top stories: TOP STK <GO>
> Charts, graphs home page: CHART <GO>
> 
> --Editors: Jeff Sutherland, Michael P. Regan
> 
> To contact the reporter on this story:
> David Wilson in New York at +1-212-617-2248 or
> dwilson@bloomberg.net


----------



## rimtas




----------



## CanOz

The DX as left its prior value area and headed off higher...

Rimtas, its broken out monthly as well.


----------



## zac

Hi rimtas,
I like the way you analyse this fundamentally.
Don't see too many people look at forex that way.
I think its bullish too for the longer term.
Im wondering how much of this has been buy the rumour sell the fact since this rise is based on speculation.

Anyway QE is about to end, unemployment/employment figures are getting better, eventually rates will rise supporting the USD.


----------



## DeepState

zac said:


> Anyway QE is about to end, unemployment/employment figures are getting better, eventually rates will rise supporting the USD.




Projected path of rates embedded into yield/swaps curve:





The expectations expressed by the Fed regionals are more hawkish than the market believes will happen.  The difference between 2 and 2.5% is material when rates are so low.  This is even more so when inflation expectations over the next 10 years are for 2%pa and well anchored:






US (and EZ) rate rise expectations have consistently surprised to the down side (yields low) which have also affected the curve.  Nonetheless, the yield premium for US bonds has increased vs Euro which makes carry progressively more attractive.  But the extent to which yields in the US will rise will be attenuated by QQE in Japan and various credit easing and possibly QE initiatives in EZ. There is already a stack of Japanese money flowing into the US looking for a return, for example.








Then you've got to consider the trade and income sides of the equation.  Enough for now.


----------



## zac

Cheers for that RY,
Where did you get the graphs from?

Thanks for the in depth take on that too. I am on another subscribed forum (paid) yet its clear that members here have so much broad knowledge.
I feel im the small fish lol


----------



## DeepState

zac said:


> Cheers for that RY,
> Where did you get the graphs from?
> 
> Thanks for the in depth take on that too. I am on another subscribed forum (paid) yet its clear that members here have so much broad knowledge.
> I feel im the small fish lol




More than welcome.  This is a big issue for 2014/15 along with the ECB monetary/credit easing and I wouldn't mind getting my ideas tested and honed as I have exposure.  There is a guy called Mike M in "Magic Acts and Mass Hypnosis and Popular Delusions" https://www.aussiestockforums.com/forums/showthread.php?t=27824 which you might like to follow.  He's very tongue in cheek, but he knows what he is doing.  So many things hang off these and it seems a good idea to understand what is possible even if directional prediction is really tough.

Sources are (respectively):
RBA Financial Stability Report just released
Wall Street Journal
Bank For Internal Settlements June 2014 Report
Zero Hedge


----------



## rimtas

zac said:


> Hi rimtas,
> Anyway QE is about to end, unemployment/employment figures are getting better, eventually rates will rise supporting the USD.




USD is not rising because the economy is getting better, it is rising because it is the most sickiest currency in the world. 
Most of the dollars are debt and USD index represents only those USD that are cash, not debt.  Debt is now imploding, so the fight for remaining cash dollars started to emerge at full swing. It is not a good sign, it is actually a very bad sign for markets overall. When market participants who trade stocks start to realize what is happening, they also will join the battle for the remaining dollars selling  their shares.  So better be prepare for this. Debt implosion is a very bad thing for the markets.


----------



## zac

rimtas said:


> USD is not rising because the economy is getting better, it is rising because it is the most sickiest currency in the world.




Cheers Rimtas,
Whats your take on the S&P500 rising so much since the GFC?
Too much loose monetary policy, ie QE.
Im not sure what to make of it as the higher implied yields would generally see a rotation of funds from equities to cash for the interest.
However something like 73% of the market is not invested in the markets yet.

Interesting times and while ive not been in the game that long, im not sure theres been a time like this before.


----------



## DeepState

rimtas said:


> USD is not rising because the economy is getting better, it is rising because it is the most sickiest currency in the world.
> Most of the dollars are debt and USD index represents only those USD that are cash, not debt.  Debt is now imploding, so the fight for remaining cash dollars started to emerge at full swing. It is not a good sign, it is actually a very bad sign for markets overall. When market participants who trade stocks start to realize what is happening, they also will join the battle for the remaining dollars selling  their shares.  So better be prepare for this. Debt implosion is a very bad thing for the markets.




Rimtas

This is very interesting. However, my understanding of your viewpoint feels/is incomplete.  Sorry if parts are just re-stating the obvious to you.  It's just not obvious to me.

Are you saying that:
1. there is USD cash and US denominated debt in circulation...
2. US Federal (and other forms of) credit is on the nose and hence money is fleeing from these into hard cash (definition M0)?
3. The index represents the exchange rate for cash, but this is not representative of the exchange rate for debt to cash from foreign holders?

As a result, you see the combination of rising yields and rising dollar, but this is actually symptomatic of a decaying economic and financial system?

My apologies once again if this is just a rehash.  The view is unconventional.  Hence my deep and sincere interest.


----------



## Trembling Hand

zac said:


> Cheers Rimtas,
> Whats your take on the S&P500 rising so much since the GFC?
> Too much loose monetary policy, ie QE.
> Im not sure what to make of it as the higher implied yields would generally see a rotation of funds from equities to cash for the interest.
> However something like 73% of the market is not invested in the markets yet.
> 
> Interesting times and while ive not been in the game that long, im not sure theres been a time like this before.




A lot of chatter lately about the S&P500 companies themselves being responsible for the upward trajectory of the market. Maybe because of the QE but not necessarily the QE money.

http://www.zerohedge.com/news/2014-...ely-indiscriminate-buyer-stocks-first-quarter


----------



## zac

Trembling Hand said:


> A lot of chatter lately about the S&P500 companies themselves being responsible for the upward trajectory of the market. Maybe because of the QE but not necessarily the QE money.
> 
> http://www.zerohedge.com/news/2014-...ely-indiscriminate-buyer-stocks-first-quarter




Cheers TH,
One thing people don't talk about, perhaps through ignorance is the number of share buybacks since the GFC.
Also overall earnings are on the rise. The lack of trading volume doesn't take much to push prices higher.


----------



## DeepState

zac said:


> Whats your take on the S&P500 rising so much since the GFC?
> Too much loose monetary policy, ie QE.
> Im not sure what to make of it as the higher implied yields would generally see a rotation of funds from equities to cash for the interest.
> However something like 73% of the market is not invested in the markets yet.
> 
> Interesting times and while ive not been in the game that long, im not sure theres been a time like this before.




Just some high level stuff to throw into the brew:

This chart shows rolling 1 yr fwd expected EPS growth, the PE based on this, and price index (rebased to 100) of the S&P.  Key point: the price index diverges from earnings from 2011. Of interest, the PE expansion that has driven markets for recent years has receded in favour of EPS growth in more recent times...a more healthy composition of index growth, some think.  Since mid 2014, post the GDP recovery from adverse weather conditions in Q1, expectations have been lifted.  It's hard for me to know if these allow for the headwinds that will arise from a stronger currency as SP500 revenue has a substantial offshore component.




The divergence between price and earnings coincided with QE2 from the Fed in late 2010:




This saw risk being brought right in, which is one of the channels that QE works through.  The equity market roughly followed suit.  This gives you the QE effect on equities.  It was also supported by the fact that EPS was actually growing where as many other major markets were not managing to do so at all.




To note in relation to buy-backs:  It is true that the amount of cash being returned to shareholders via buy-backs has been growing and is now approaching levels in the pre-GFC period.  However, the contribution to EPS growth from buy-backs is virtually non-existent in the last couple of years.  Why?  Corporates are still deleveraging on a net basis and net issuance of seasoned offerings exceeds buy-back volumes.





Retail is pretty flat in terms of flows to the market over the last couple of years.  Insto is accumulating.

There have been times like this before.  Most recent one for a major market probably would be the Plaza Accord...excluding those currently in play.  Didn't end so well for one of the players.

Notwithstanding the above, the question really is: what next?


----------



## rimtas

DeepState said:


> Rimtas
> Sorry if parts are just re-stating the obvious to you.  It's just not obvious to me.
> .




Hi RY, in order to understand how USD behaves, you first need to understand what actually is _a  US Dollar._
I'll try to be as short as possible...

Originally, a dollar was defined as a certain amount of gold. Dollar bills and notes were promises to pay lawful money, which was gold. Anyone could present dollars to a bank and receive gold in exchange, and banks could get gold from the U.S. Treasury for dollar bills.

In 1933, President Roosevelt and Congress outlawed U.S. gold ownership and nullified and prohibited all domestic contracts denoted in gold, making Federal Reserve notes the legal tender of the land. In 1971, President Nixon halted gold payments from the U.S. Treasury to foreigners in exchange for dollars. Today, the Treasury will not give anyone anything tangible in exchange for a dollar. Even though Federal Reserve notes are defined as “obligations of the United States,” they are not obligations to do anything. Although a dollar is labeled a “note,” which means a debt contract, it is not a note for anything.

Congress claims that the dollar is “legally” 1/42.22 of an ounce of gold. Can you buy gold for $42.22 an ounce? No. This definition is bogus, and everyone knows it. If you bring a dollar to the U.S. Treasury, you will not collect any tangible good, much less 1/42.22 of an ounce of gold. You will be sent home.

Some authorities were quietly amazed that when the government progressively removed the tangible backing for the dollar, the currency continued to function. If you bring a dollar to the marketplace, you can still buy goods with it because the government says (by “fiat”) that it is money and because its long history of use has lulled people into accepting it as such. The volume of goods you can buy with it fluctuates according to the total volume of dollars ”” in both cash and credit ”” and their holders’ level of confidence that those values will remain intact.

Exactly what a dollar is and what backs it are difficult questions to answer because no official entity will provide a satisfying answer. It has no simultaneous actuality and definition. It may be defined as 1/42.22 of an ounce of gold, but it is not actually that. Whatever it actually is (if anything) may not be definable. To the extent that its physical backing, if any, may be officially definable in actuality, no one is talking.

Let’s attempt to define what gives the dollar objective value.  The dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, *the dollar is a promise backed by a promise to pay an identical promise*. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the _dollar is a promise to pay nothing_. The Treasury should have no trouble keeping this promise.

I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt. I can explain further what I meant by saying "cash dollars" in a previous post, but for today I had enough writing

.........................................................................

To determine what trend dominates the markets everyone can do this by monitoring the two most sensitive barometers of monetary trends. One is the currency market. If the price of the dollar against other currencies begins to plummet, it might mean that the market fears dollar inflation(the opposite is true). On the other hand, it might simply mean that credit denominated in other currencies is deflating faster than credit denominated in dollars or that foreign demand for dollars to buy U.S. stocks, property and products has waned.

 The other monetary barometer, which is more important, is the gold market. If gold begins to soar in dollar terms, then the market almost surely fears inflation.  As the gold is now in a downtrend, the opposite is obvious.
The bond market will not make the best barometer of inflation because much of it will fall under either scenario.
Sorry for taking too long, maybe you'll find your answers between the lines...
Cheers


----------



## DeepState

Hi Rimtas.  Thankyou so much for taking the time to outline your thoughts.  I enjoyed your hard currency perspective.  In the spirit of discovery via discourse, I outline my thoughts on various points you have made in the event you (or others) feel like correcting or contesting these views.  With debt serviceability a meaningful issue, this has importance to USD. So, at least I care!



rimtas said:


> Today, the Treasury will not give anyone anything tangible in exchange for a dollar. Even though Federal Reserve notes are defined as “obligations of the United States,” they are not obligations to do anything. Although a dollar is labeled a “note,” which means a debt contract, it is not a note for anything.
> 
> Congress claims that the dollar is “legally” 1/42.22 of an ounce of gold. Can you buy gold for $42.22 an ounce? No. This definition is bogus, and everyone knows it. If you bring a dollar to the U.S. Treasury, you will not collect any tangible good, much less 1/42.22 of an ounce of gold. You will be sent home.
> 
> Some authorities were quietly amazed that when the government progressively removed the tangible backing for the dollar, the currency continued to function. If you bring a dollar to the marketplace, you can still buy goods with it because the government says (by “fiat”) that it is money and because its long history of use has lulled people into accepting it as such. The volume of goods you can buy with it fluctuates according to the total volume of dollars ”” in both cash and credit ”” and their holders’ level of confidence that those values will remain intact.





I understand that the term 'note' was replaced by the term 'bill' around 1971 to reflect the non-convertibility and entirely delinking of the US dollar and gold.

Fiat currency in the past was largely undone by profligate spending by governments and the acquiescence of whatever passed as a central bank at the time.  One important reason that fiat stays relevant is the belief that such expenditure won't take place because central banks are more independent than before.  And then there is Japan, which defies both arguments.  Another important reason why fiat holds is that it is the only acceptable means through which you get to pay your taxes.

In the case of the USD functionality, part of the reason might be the arrangement Kissinger achieved with the Saudis to require oil settlement in USD as the convertibility arrangement ended. This created a demand for dollars.

As for variation in prices, gold was often associated with outright deflation, a form of price instability.  From about Volcker, price stability became a staple in the US and something which has been readily achieved.  Interestingly, the major problem facing the fiat economies is deflation.  To the extent that this exists, it is not at catastrophic levels which is a benefit of fiat in conjunction with fractional reserve banking (if the banks would actually lend). Yes, there are drawbacks to this in the form of periodic financial crises. Pick your poison.




rimtas said:


> Let’s attempt to define what gives the dollar objective value.  The dollar is “backed” primarily by government bonds, which are promises to pay dollars. So today, *the dollar is a promise backed by a promise to pay an identical promise*. What is the nature of each promise? If the Treasury will not give you anything tangible for your dollar, then the _dollar is a promise to pay nothing_. The Treasury should have no trouble keeping this promise.
> 
> I called the dollar “money.” By the definition given there, it is. I used that definition and explanation because it makes the whole picture comprehensible. But the truth is that since the dollar is backed by debt, it is actually a credit, not money. It is a credit against what the government owes, denoted in dollars and backed by nothing. So although we may use the term “money” in referring to dollars, there is no longer any real money in the U.S. financial system; there is nothing but credit and debt.




Why are bills backed by government debt?  In creditor nations, which also predominantly (entirely) fiat, there is no net debt and no convertibility.  The US just happens to have government debt.  You only require the backing of the US government, for this concept, if you buy a government bond.  Holding cash requires nothing and it is entirely feasible that we have a cash economy without debt.  If the currency was not capable of forgery and had a fairly stable volume, this is akin to gold, denarius or seashells - and fortified by the fact that it was a reasonably acceptable means of exchange for goods, services and tax.  I do not think that it is correct to say that a currency is backed by debt.  A currency can buy a debt and issuance of debt buys currency.  It is no less correct to say that currency backs debt than debt backs currency.  This is why definitions of money move from notes and coin though to wider definitions which include debt securities.  They are all money.

There are some pretty heavy hitters in monetary economics which are even suggesting a cashless society.  Zero currency in circulation.  Their reasons are for efficacy of monetary transmission.  However, things like EFTPOS and the like highlight that we are heading in that direction.  Money won't even exist.  There will be debts and credits galore though.  Just like now.

In the case of sovereign default, you generally see a depreciation of the currency.  However, the mechanics of this are more than to say government default automatically leads to a debasement of a currency (think Greece whilst in EZ).  Maybe, maybe not.  Certainly depreciation of currencies can happen whilst sovereigns remain intact (think Asian crisis and Taper Tantrum).  Hence the link between sovereign default and currency is not tight enough to confidently accept that currency is backed by government debt.  I do not think it is.  You cannot front up to Treasury with your bill and demand exchange for a government debt.  You can, however, seek to buy it in the open market like any other security.  Currency is not a claim on a sovereign.  It is, however, issued by a sovereign and creates seignorage when this occurs.  Something for next to nothing, although transfers in wealth do result from this activity.

Money, today, is intrinsic value.  It is a means to exchange stores of wealth for goods and services.  It works because...get this...actually, you already get this...we all agree to do it. Our financial system is built on it. Talk about the ultimate fad.  Money is as money does.  Apparently.  The world keeps spinning.




rimtas said:


> To determine what trend dominates the markets everyone can do this by monitoring the two most sensitive barometers of monetary trends. One is the currency market. If the price of the dollar against other currencies begins to plummet, it might mean that the market fears dollar inflation(the opposite is true). On the other hand, it might simply mean that credit denominated in other currencies is deflating faster than credit denominated in dollars or that foreign demand for dollars to buy U.S. stocks, property and products has waned.
> 
> The other monetary barometer, which is more important, is the gold market. If gold begins to soar in dollar terms, then the market almost surely fears inflation.  As the gold is now in a downtrend, the opposite is obvious.
> The bond market will not make the best barometer of inflation because much of it will fall under either scenario.




At present, the inflation expectations embedded in professional forecaster surveys and embedded in swaps and inflation linked securities converge on a stable figure of 2% per annum. This is an estimate for the next 10 years.  So no break out of inflationary or deflationary concerns is indicated.  The currency movements (say, vs Euro) have been strongly influenced by carry and, more recently, by the hope and subsequent disappointment for EZ growth.








The price of gold has actually been stable in other major currencies (incl Aussie).  Hence inflation in these currencies is implied to be less deflationary than the USD following this argument. However the opposite case is widely observed.

Ultimately, I cannot reconcile concerns for inflation which are not priced into expectations from several angles with appreciation of the dollar.  Relative yields are rising and this can directly be traced to QE taper, also from many angles.  When coupled with a rising USD vs RoW, this is more a sign of improved demand for US assets and capital which is being formed.  It probably also reflects the improved balance of payments position as well (the other side of the ledger).

....a nugget of hard currency for your thoughts?


----------



## DeepState

Item of possible interest.

The following are two 'Dendrograms' which portray the relationship between the major currency pairs.  They are all expressed to the USD numeraire to prevent overlap.

Here are the relationships for the last year.  The currencies have been standardized for volatility which means we are analyzing the currency characteristics after adjusting the outcomes for the volatility as measured over the analysis period.  The USDJPY volatility is adjusted to match the AUDUSD volatility, for example.

The chart below relates to the last 12 months worth of data, analysed daily.




It shows that the CHF and EUR share a very tight relationship and basically move in unison (so what's new).  The AUD performed somewhat similarly to the CAD as might also be expected, but this relationship is no where near as strong.  As a group, they performed very roughly similary to the JPY. And so on.

The following chart analyses data for the last 90 days.





The underlying idea behind all of this is to break the changes into underlying drivers and try to see if you can figure it out if you are fundamentally oriented or identify which drivers have momentum or reversion.  The following chart breaks down the performance of the underlying 'factors' which are moving the currencies,  They are statistically determined and do not explicitly say what is going on.  Some people trade based directly on these.  Some people will try to figure out what they are via a range of methods to see what they make of the major currency drivers.  This is where the alpha is created and skill is required.

The chart below shows the day to day performance of the major drivers.  You can see big spikes, particularly in the first series (blue).  Different currencies have different sensitivities to each of the factors.




The volatility of the factors is of very significant importance.  These form the core of many risk estimation techniques and practices used widely in the institutional world of currency trading.  It can be argued that this produces a degree of financial system instability because the practice is so common.

Tech notes: PCA, Euclidean distance, all items detrended and standardized hence analysis of correlation rather than Covar, inner square distance.  Anyone out there?


----------



## rimtas

From my point of wiev, USD is topping. After one more pop-up it should begin the largest correction  in the last 7  months. AUD should rise I suppose if this is about to happen. 
Gold and silver have made their bottoms already and should advance in a multimonth rally. Probably even oil will reverse it's course.


----------



## DeepState

FYI.

Just rebuilding some stuff.  Here's some basic results on one widely known strategy.  Checking (confirming, really) for evidence of momentum in relative performance.  Currencies over-react in the near term for various reasons.  Over longer timeframes the behavior is different.  Currency is not like other asset classes and does not impound information which is discounted far more quickly in other asset types.

A very basic first step to checking if a concept works is to generate 'signal' and check to see if it has predictive power.  That all sounds very obvious.  However, the way this is done from the world I came from is not along the time dimension for a single currency. That is, not thinking in terms of a single currency pair and looking for turning points through time. Instead it compares their merits across a set of choices at a given time.  The methods are different and so is the trading and portfolio management.

So here are some results on a very simple signal based on the returns of a set of currencies vs USD for one fixed period (eg. like 3 months). It doesn't get much simpler. The currencies are the majors per prior entry. To check for implementation we check for the decay profile (what happens if you are slow to implement).  We split the time periods etc.. First, we check for rationale.  The tests actually come much later.

There is strong evidence of a viable signal on just this simple idea alone.  There are many steps to go from here before this baby is ready for the track.  But, it has form.

Data is 20 years to today for six currency pairs alone (with more, you can expect even stronger outcomes). Daily data.  Signal is just historical 3 month return vs USD.  How simple!  There are virtually no moving parts to fiddle and hence data mining risk is way down.  You can write the formula on a pea by hand. A good test.

What is being analysed are the ranks of the signal and the ranks of the outcome. This controls for a lot of issues related to risk management or the time being. The decays show how the performance of the strategy varies as you delay implementation from overnight to 20 business days.  Notice how it rises before falling...that's because currencies over-react in the near term.  It is actually better to let things slide a bit.  Perhaps there is room here for T/A type analysis to finesse it.

Results are strongly statistically significant.  Analysis of the last 10 years is borderline statistically significant and the shape of the decay curve is basically the same.

WARNING: If you choose to build a portfolio on this idea without some very decent risk management ability any apparent insight will be strongly eroded.  Also, this is not the same as saying just because a currency pair has moved in a direction that it will keep doing so.

Because there are no fundamentals used as a direct input, you could possibly label it as a form of T/A for this predictor.  Generally, this type of process would not be called technical analysis in the industry. For me, if it (more likely something different) survives further refinements, it would form one part of a wider set of strategies so the whole suite would not be said to be pure T/A.  A mix of ideas helps with robustness.  Momentum can be slow to turn or, no surprise, overrun.

Here is an idea which has good rationale before examination of outcomes, is formed by a method that is almost impossible to simplify, is strongly statistically significant, easily covers frictions (what frictions?), and can be implemented due to adequate time allowance for trading prior to decay.







If there are others out there working on anything in this area....


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## DeepState

FYI

The results below follow on from the prior posts and are for interest rate differentials. Carry.  The difference in interest rates between two countries is a predictor of the movement of the exchange rate between them.  The higher interest rate country is expected to appreciate.  This is termed a violation of the uncovered interest rate parity relationship.  It is probably the single biggest violation of an arbitrage related financial relationship in terms of money transfer between what is predicted in pure theory sense (interest rate parity should provide an unbiased estimate of currency movement) and what actually happens (the opposite).

The charts below are for the 10 year period to Friday.

Key take-outs:

This is a super-powerful (the columns are high) slow burn idea (the columns are flat) but hit a sudden stop at the GFC.  In terms of the actual relationship between the predictors and the outcomes on a rank-to-rank basis, there was a hit, but it has been relatively flat line since then.

A key reason why the idea hit a stop was that interest rate differentials converged post GFC.  If you excluded Australia from the stats, the chart showing the standard deviation of the cross section would be much lower.  There was virtually no interest rate differential to profit from hence the predictor is very weak....that might all be changing with the normalization of policy in the UK and US.  After a period of dormancy, carry is likely to be returning and it is visible in the stats.

The underlying drivers of carry and the risks to it can be ascertained via examination of national accounts and other financial market information.  You do not (have to) simply rely on the raw figure.  That said, the raw figure works when there is opportunity to do so.  The opportunity is returning.











If anyone out there is a discretionary FX trader/investor who considers such matters and underlying economic data, it would be good to hear from you. My trade horizon is measured more at the month(s) level than intraday. My assessment window is measured in years.  These are slow moving ideas.

This stuff works. It provides a basis from which discretionary analysis can be used to confirm or deny the validity of the signal.  This is essentially the way to ascertain whether the currencies are pushing their luck.

The next step is to produce risk management estimates to assist with position sizing across a portfolio of FX exposures. I intend to combine GARCH family estimates on individual PCA components, recombined into a covariance matrix and cross check the outcomes with 21d VaR analysis.  The final portfolio will be strongly informed by these but is ultimately discretionary.


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## DeepState

....and as if to confirm the assertions for the prior post, here are the figures for 10 year bond interest rate differentials.  Although the target of QE of various forms, these are less directly controlled by the CBs and hence their dispersion was not compressed by as much.  The results were better than the ones I showed before (which were for 3 month maturity).


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## rimtas

RY, just a simple question- what is an outcome of your observations and analysis, where the US Dollar is going medium/Intermediate term? 
Because any analysis should eventually generate simple buy/sell signals depending on the time frame analysed. 
As the worlds reserve currency, US Dollar is the leading indicator to everything-if it rises, it indicate a deflationary pressure on all markets.  By determining a probability of the future trends in USD we can anticipate how bond and stock markets will behave.

Thanks,


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## DeepState

rimtas said:


> RY, just a simple question- what is an outcome of your observations and analysis, where the US Dollar is going medium/Intermediate term?
> Because any analysis should eventually generate simple buy/sell signals depending on the time frame analysed.
> As the worlds reserve currency, US Dollar is the leading indicator to everything-if it rises, it indicate a deflationary pressure on all markets.  By determining a probability of the future trends in USD we can anticipate how bond and stock markets will behave.
> 
> Thanks,




Here's a representation of a simple 3 month momentum signal and 10 year bond interest rate differential signal as at current day.

Essentially, the model would suggest buying GBP and CAD vs US and funding it from JPY vs USD.  The rest are not high conviction positions.  

One of the features of this approach is that it regards the USD as the price of each currency and then tries to figure out how the price of each currency will change against each other.  Everything is relative in that way and it will not generate an absolute Buy or Sell USD vs Rest of World.  It generates a portfolio of pair trades amongst the major currency pairs vs USD.  

This is a pair-trade model.  Deep inside it is an attempt to figure out what the best exposures are to 15 possible pairwise currencies (ie. AUDGBP, GBPCAD, JPYEUR...) and to achieve these via USD denominated positions. In other words, what it is really saying is it likes GBP and CAD vs JPY.  Along the way, you can make an inference for what they think about the USD - but that's not always the case.

Your simple and clean question has been met with a complex response.  Still, I hope it adds a little to your adjudications.


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## rimtas

Thanks RY, the answer satisfies me


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## DeepState

DeepState said:


> The next step is to produce risk management estimates to assist with position sizing across a portfolio of FX exposures. I intend to combine GARCH family estimates on individual PCA components, recombined into a covariance matrix and cross check the outcomes with 21d VaR analysis.  The final portfolio will be strongly informed by these but is ultimately discretionary.




Here's what it looks like:

--






--
Here is what it means:

For a data window length of 250 business days going back from yesterday, risk for a currency basket is calculated.
The currency positions are a USD 1m LONG AUDUSD and balancing SHORT CADUSD.  In other words the basket is LONG AUDCAD for USD 1m.

Two risk measures have been used and two time horizons have been examined for each.  One is a Horizon period.  I have chosen this to be 21 business days, or basically a calendar month.  The other is daily.

The first risk method is GARCH (1,1) PCA.  In essence, it breaks down the performance of the currencies under consideration into underlying statistical drivers.  Each of these is then individually examined for risk characteristics and forecast using a method called Generalised Autoregressive Conditional Heteroskedasticity.  This class of time series models is seen to be a solid estimator of future volatility given observed volatility.  These forecast risks are then recombined to form a representation of the risk/correlation relationship between the currencies for the next 21 days (this number can be changed).  The outcome is the standard deviation of dollars at risk based on single standard deviation over the horizon period (~25k).  You can also infer what that means for a daily level of risk (~5k).  Over the relevant period, dollars made or lost are expected to be within these figures 67% of the time.  You can double the figures and then you would expect that, 95% of the time, your P&L will be within that band.

To cross check this, Value-at-Risk has also been calculated based on data over the selected window.  This looks at the returns which this portfolio would have achieved in history.  Daily and rolling 21 days results are calculated.  The figure of interest is what the worst 5% of these observations was.  This is known as VaR(5) for each series.    You can change the threshold to whatever you like, but 5% and 1% are the standards. Over the window, 5% of rolling 21 day outcomes were worse than ~38k.  Over a 1 day period, the corresponding figure is ~7k.

The GARCH PCA is showing a higher risk level once the probabilities are brought to a common basis.  That is because it takes into account recent risk spikes in a more sensitive fashion.  Currencies have been more volatile over the recent period than over the year on average. Risk spikes tend to persist for a while. Hence the GARCH PCA method is estimating higher than usual risk.  In contrast the VaR analysis just looks at things over the window and does not make those types of adjustments.  The benefit of VaR is that is takes into account the shape of the return distribution in a way that GARCH PCA cannot.

Both measures are informative when deploying and analyzing portfolio risk.

In combination, this tool will assist with determining how to size positions given a particular level of risk appetite.  By using it in a different way, it will also help with determining the composition of that risk (how to size different currency pairs when there are many moving parts).

These are the basic tools that are used in the professional market for simple situations like this.  You can add a lot more bells and whistles.  In my case, I'm not running anywhere near as tight to require much building on top of this in a time series statistical sense.  Positions will also be supplemented by stops.  Other risk management takes the form of fundamental analysis of the economies in question and skews inherent in the currency options market.

Once again, if there is anyone out there doing something of this nature, dialogue would be welcome.


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