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No Dollar Devaluation. Really?

 October 20, 2010 01:45 PM

U.S. Treasury Secretary Timothy Geithner has finally spoken on the subject of the US Dollar. His comments came in response to questions from the Silicon Valley crowd. According to Mr. Geithner, "US will not engage in dollar devaluation. It is not going to happen in this country". Not only that, he also claim that "United States work hard to preserve confidence in the strong dollar." Yes, as hard as his "confidence" of the Yuan revaluation, which he has maintained for a long time now…

Unfortunately, he failed to reveal exactly what steps are taken keep the confidence in USD? If one was in a very charitably disposition, it could said that Mr. Secretary is overly optimistic. Somebody more direct would say that he is blowing smoke, or lives in some kind of delusion. When CNBC played a clip of his speech this morning, reporters in the studio were laughing out loud.  Clearly, the new round of quantitative easing by the FED cannot be one of the action which inspires faith in our currency. There are even voices that financial authorities are deliberately pushing the Dollar down, in order to somehow cope with our mountain of debt. Expression "Gutting the Dollar" was recently used. But talk is cheap, for either side, so one has to look at how the market sentiment is. Not a pretty picture.

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The Dollar is at or near all time lows in relation to many currencies. That is reflected in the USD Index, which dropped to 77.00. While not at an extreme, this is historically low level with the next support at just above 74.00. What is perhaps more troubling, is the failure in June to move above the most recent high at 89.00. Even though it rebounded today, the Index screams that the Dollar is in trouble, not a sign of confidence. Frankly, it even supports the sinister views of deliberate devaluation through "printing money".

Every now and then I get questions about gap trading and just today the subject of why are my trades closed by the end of the day even if the gap remains? The answer can be seen on the same chart of USD-CAD, only including today's data. I left on 15 M period, so the gap is clearly visible. My research indicates that if the opening gap after the weekend is not closed by the end of the trading day (Monday 2 PM EST), it might hold for much longer. On occasions it tool weeks before price returned to the gap level, and I could not find a discernible statistical pattern how long it takes. Obviously, the support mentioned yesterday has not been tested, but the upper levels of the price range are starting to consolidate, which will likely lead to a breakout either way.

The intermediate term chart of the EUR-GBP shows that the uptrend has stalled. In fact. the price has developed a possible head and shoulders reversal pattern. It is not complete, yet, but the 0.8695 support (neckline) provides a promising short entry. On the other hand, if the price 0.8830 area, that would indicate a market in a consolidation after a rally, which favors resumption of the up trend. For now, however, I am looking at this chart with the H&S in mind.

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