USD Traders: Here’s What Comes Next

08/12/2011 6:00 am EST

Focus: FOREX

Michael Radkay

President and CEO, RDS Trader, LLC

Following the debt-ceiling resolution in the US and recent central bank action in several world nations, here are the key fundamental and technical drivers impacting the US dollar against major currency counterparts.

With the debt ceiling raised and more of the same out of Washington, what does that mean for the worth of US dollar in your pocket? Now, I can get into a fundamental debate with you or give you the traditional Democrat or Republican response and express all the things I feel are right and wrong with the debt decision, but I feel there is too much talk.

As people express their opinions, they always seem to get clouded with things that will eventually benefit the person delivering the opinion. We have heard politicians say what they believe, and of course, what they say, if implemented, will benefit their ideals. Debate is necessary in order to make a decision, but the drama that the media fills our head with is enough to make it spin off. In the end, media opinion doesn’t really make an impression on me, but what has always been important is when the decision makers finally make a decision.

I have been saying at past Traders Expos that I have never met an investor who gets involved in hopes of losing money, so recent price action is pretty revealing to help you with upcoming buy/sell decisions of your own based upon what you know.

When price moves, somebody bought and somebody sold; a decision has been made! Right or wrong becomes the only outcome when the game is on. What we get now is a big dose of reality. In trading, there are two teams, bulls (buyers) and bears (sellers). Sports and competitions are divided in the same way. For that matter, so is Washington, with Democrats and Republicans. Step into a court room and there is a plaintiff and a defendant. Walk into a grammar school during recess and see the kids divided into two groups playing dodgeball or kickball. Life is a series of games; some are playful and some are serious.

We all need something to do on this spinning rock, so for the time being, I am grateful that the supposed “smartest people in the world” (our US government) came to their senses and didn’t screw up (at least not totally yet) one of the greatest adult games on the planet: our economy! If we don’t have an economy, what would us grown-ups have to do? Maybe we could act in kind, as it seems they have, and decide who wins with a good game of dodgeball with winner take all!

I don’t mean to make this sound so trivial, but I am actually a bit in awe as to how immature our government on both sides played politics down to the wire. Nothing like a nice global adrenaline rush to get the party started! I realize they are in their position to make tough decisions that affect billions around the globe. Tough debate is necessary, as both sides have a point, but with the world watching our US government throw up a last minute desperation shot with seconds to spare, come on!

NEXT: Is a US Dollar Comeback Brewing?

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The US dollar (USD) seems to be on a bit of a comeback post debt-ceiling drama. Higher deficits do not bode well for dollar strength, but if spending and taxation get under control, a reversal may be in order, and it may be what sidelined and battered USD bulls have been waiting for. Since I personally can’t move the market myself, I have to rely on what we call the “big dogs” to help. The big dogs are governments, federal reserves, banks, and hedge funds. They can move the markets, and it is up to us as individuals to decide which team we want to join.

Now don’t take my word for it about a possible bullish USD run; take a look at how price was reacting leading up to the debt-ceiling decision (July) and the couple of days since the decision was made (early August).

chart
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As an individual trader, I have to step on the backs of the big dogs and go for the ride when I enter the market. I need them to move prices to where I desire. Who is winning becomes the real question. Timing is of course important, and making a timely decision is equally important. The daily chart reveals before the debt-ceiling decision that many currencies paired against the USD were strengthening.

Leading up to August, the Australian dollar (AUD), New Zealand dollar (NZD), euro (EUR), and British pound (GBP) were all climbing versus USD, and the dollar was falling against the Japanese yen (JPY), the Swiss franc (CHF), and the Canadian dollar (CAD). But take notice of the recent reversal post debt-ceiling decision and as we move into the first few days of August.

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The reality is that the recent USD run is due in large part to the Swiss National Bank’s (SNB) rate cut and the Bank of Japan’s (BOJ) intervention to try and stunt strength to their respective currencies. The currencies that seem to not be tied as much to all of the carnage, like the JPY and CHF, are being sought as safe-haven plays.

When comparing the two, it seems the CHF strength across the board signals the globe has been tagging it as supreme so far in 2011. There is always a ripple effect. The SNB acts, the US government deals with debt, and then the BOJ steps in with a move. Big dogs act when big dogs act, and we need to pay attention.

If the recent USD bull train comes up short and jobs data tumbles in the coming months, investors will continue to seek the CHF and JPY for safety. Now, I’m not one for lengthy predictions, and since a weatherman doesn’t forecast past a week, I always say why should I, so I will be adjusting on a weekly basis and riding the backs of the big dogs as the news and price shifts.

If you do decide to jump on board the USD bull train, search for bottoms on your chart and as prices revisit those big dog standout lows, check your risk, and make a decision!

By Mike Radkay of RDSTrader.com

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