Mr. Market is an addict and Bernanke is his drug dealer. Last week the Fed announced another round of quantitative easing, proclaiming to the world that it will buy up more mortgage backed securities in order to keep interest rates at historically low levels. It seems traders don’t care what the Fed buys as long as they keep the QE announcements coming.
With this latest introduction of QE, the market has continued its advance in a ‘risk off’ manner that appears to be duplicating the reaction we saw in 2010 and 2011. With that, the U.S. dollar has been taking quite a beating. It’s close to giving up 50% of its advance from the May 2011 low and is approaching the previous short-term low from earlier this year.
HOT KNIFE THROUGH BUTTER
The chart below shows the price action for the U.S. dollar along with Fibonacci Retracement lines from the May ’11 low to the July ’12 high. Retracement levels can be used to give us an idea of where we might expect markets to find support. The first possible support came in at $79.69, the 38.2%
retracement, and dollar bears snapped it like a hot knife through butter.
Next up will be the previously mentioned 50% retracement. As we approach this area of support we can see in the top panel that the RSI indicator is flashing an oversold reading. But it’s important to remember that just because momentum may be oversold doesn’t mean it can’t become more oversold.
TIME TO TAKE A BREATHER?
It wouldn’t be surprising to see dollar bears take a breather before thrashing their claws at what use to be a safe-haven in the currency market again. However, when you have central banks step in like the Federal Reserve has done and the ECB may do at any moment, we must respect their actions and take them into account when viewing volatile currency markets like the U.S. dollar.
Disclaimer: The information contained in this article should not be construed as investment advice, research, or an offer to buy or sell securities. Everything written here is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned.
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