Is The Dollar Breaking Down?

It is Sunday night, the 22nd of April here in Asia. We are about to enter the last trading week of April. The week finished of with positive market movement in the risk on space, while the US Dollar sold off by about half a percent. Spanish & French Bond auctions went by pretty smoothly, but majority of market participants believe it was only an ECB smoke-screen. US Initial Jobless Claims once again disappointed to the upside and quite strongly too. Philadelphia Fed Manufacturing also disappointed while the German Ifo Business Climate surprised to the upside. 

Early next week we can expect the following important economic data releases:

• EU, German & French PMIs
• Italian & French Consumer Confidence
• Taiwanese IP
• Australian CPI

All in all, US economic data keeps surprising to the downside, according to the Citigroup Economic Surprise Index. Since the US Banking Crisis unfolded in 2008 and Lehman Brothers went bust, no other major bank or financial institution carrying large debt holdings has been allowed to file for bankruptcy. Each slowdown in economic activity since than, has increased the risk of another systemic failure and put pressure on global central banks to maintain the recovery on life-support. 

So far Fed has engaged into QE2 as well as Operation Twist programs as the economic data disappointed in middle of 2010 as well as middle of 2011. As we can see in the chart above, so far we are in a 2011 replay. Is it too early to think that the Fed will ease yet again or extend the current OT program? There are now certain market price hints that traders and investors are on the verge of discounting further Fed easing. These hints come to us via currency markets and especially the US Dollar. Let us quickly review the state of the Dollar.

Technically, the price action has been locked inside the triangle for months now. The Dollar has not been able to make any new highs, despite still remaining in an uptrend and making higher lows on its bullish trend line. Friday's price action is moving to the bottom part of the triangle, looking like this last week of April could set us up for a breakdown. Obviously, we have to be aware of any false or fake movements.

Furthermore, the price broke down on Friday from a compression of short and medium term moving averages. Whenever moving averages of all types compress, it lets us know that there is an agreement of price at that current level between bulls and bears. However, markets are naturally volatile and these agreements never last for long. Breakouts or breakdowns from MA compressions tend to be signals of trend changes.

My personal Asian Currency Index is signalling that the correction, which occurred in August & September of 2011 has been basing and building a bottom for the last few months. There is an above average chance that Asian currencies (high yield) will lead the charge higher against the US Dollar. Technically, we are now in a coil between support line and 200 MA, and a break out in either direction should occur soon. Obviously, as stated before, we have to be aware of any false or fake movements.

Sentiment wise, investors remain extremely bullish the Dollar. What has been very interesting to me is that the Trade Weighted Dollar Index (as well as the DXY) have failed to make new highs above the January peak, and yet investors continue to hold very large US Dollar positions on the futures market. This type of non-confirmation is definitely a warning signal for greenback bulls.

Finally, seasonality for the US Dollar tends to be below average during second half of the year. As we enter May, according to seasonal strengths and weaknesses, we could maybe expect a last burst of buying, before the Dollar eases into a downtrend for the last two quarters. Keep in mind that seasonality is not a holy grail and just a statistical probability.

Summary

FOMC meeting starts Tuesday and its a two day affair. I believe, Bernanke's comments could be a trigger for the Dollar's triangle, which is now on the verge of breaking down. As the economy keeps slowing, Bernanke could hint at further easing or at least warn the markets that if economy does slow down more, further easing will be guaranteed. Technically, the USD looks weak while sentiment is extremely bullish. Obviously, as stated before (once more), we have to be aware of any false or fake movements or Bernanke's comments refusing to ease, which would send the Dollar in the opposite direction. The triangle has not broken just yet...