Dollar Dilemma

Fundamentals

The Dollar Index rally seems to have stalled at the moment, as traders take profits and reassess market fundamentals. The market has lost steam from the January rally, but there seems to be sufficient signs of an economic recovery in the US, and just enough concern over the situation with Greece to support a stronger greenback during the past several weeks. The most recent news from Europe suggests Germany strongly opposes aiding the country’s troubled treasury, tempering hopes that the nation will get a much needed cash infusion. For the exchange rate of the Dollar to move higher, however, traders may be holding out for fresh economic data that shows the US economy is improving . Yesterday’s housing data did show housing starts picking up at a faster clip than market observers had expected, and building permits did beat analyst estimates, although they were down from December. If US economic conditions do continue to improve, the greenback may find itself continuing to gain against the yen, which may continue to find itself on the short end of the carry-trade. Inflation data over the next two days may have help set the near-term direction for the Dollar. If inflation is higher than expected, treasuries could fall out of favor with investors, who may choose to invest in equities and commodities instead. This scenario would present significant challenges to the US currency.

Trading Ideas

Market technicals and fundamentals do not provide a clear direction for the Dollar. Given the volatile nature of the currency markets, the odds of the Dollar Index trading in a quiet, tight range are not very high. For this reason, some traders may wish to put on a straddle trade, looking for the market to make a move. For example, some traders may wish to buy the March Dollar Index 80 call (DXH080C) and the March 80 put (DXH080P) for a total premium of 1.50, or $1,500. To at least break even at expiration, the price of the DXH10 will have to close at or above 81.50, or below 78.50 at expiration.

Technicals

Turning to the chart, we see the Dollar Index crossing through technical support at 79.50 and psychological support at the 80.00 levels. Prices will likely have to break-out above resistance at the 81.00 level, which is the upper end of chart congestion from May to July of last year. If the market is able to gain traction above the 81.00 level, the chart does not show significant resistance until prices near 85.00. On the flipside, the market does risk confirming a small double-top on the daily chart on a significant close below the 79.70, which could send prices tumbling into the mid 70’s. Thus far, prices were able to hold the 20-day moving average after testing it on Tuesday. A close below the average could be seen as negative over the near-term, as it would indicate that a near-term high may be in place.

Rob Kurzatkowski, Senior Commodity Analyst