Could it be ready to mount another rally? We turned negative on it several months ago and suggested individuals purchase the British pound and Swiss franc. Those that bought the pound did very well indeed
We just want to be clear in one area. We are not bullish on the dollar in the very long term. We are almost certain that the Swiss Franc will trash the dollar in the long term. However in the short to intermediate time frames the dollar might be ready to mount another rally. We were expecting the dollar to mount a rally and were quite bullish on it last year and for several months into this year. It did mount a rather decent rally but it did not go as high as we would have liked it to go. From a low of 80.50 it rallied all the way to the 92 plus ranges before correcting; a gain of 14.1%. The dollar has mounted quite a correction in a relatively short period of time; from its high (92 plus) in Dec 05 to its low June 06 it has corrected over 10% in approx 6 month. For any developed nation a correction of this magnitude is indeed rather large. Hence it appears that there is now a good chance that the dollar might rally again. There are almost no real fundamental reasons we can find for this rally. However there are some psychological and technical reasons that might make sense.
1) On the hourly charts the Dollar flashed a series of rather strong positive divergence signals.
2) The dollar is still disliked by the majority and so from a psychological perspective it has the ingredients that appear to make it a good short term investment.
3) For foreigners that have been investing heavily in overseas markets; the US market appears to be rather cheap both the equities and commercial real estate. Hence money could start to flood both sectors; indeed quite a bit of foreign money has already hit the commercial real estate sector and it looks like it’s not going to let up soon. Since both these transactions have to be conducted in US dollars it might create a temporary demand for the dollar.
As we stated last week a relationship appears to exist between the US dollar and the markets in that they tend to trade in the same direction. Now if the dollar is going to mount a rally which appears to be already in the early stages then it looks like the Equity markets could rally significantly higher. All the dollar now has to do is slowly trend upwards. In fact if it were to trade sideways or remain locked in a range it would still be probably enough to propel the markets to new highs. Market Update Oct, 10, 2006.
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