When everyone and his auntie know about the weakness of the dollar, that means that the dollar is at historical buy level. That moment has arrived and the old thinking is now more.
I have made more than 300 pips just this week along shorting EUR/USD (shorting means selling the pair EUR/USD). Before I tell you why I sold the dollar and bought the euro, let us first revisit the dollar "weakness" argument as you would hear it from a bear on the dollar (a bear is someone who is thinking the dollar will continue to weakness and is selling it and buying another currency).
The old thinking that the dollar is weak and will get weaker goes something like this: "The USD is only paper money supported by an illusion as the economy is weak, we have a credit crisis (credit crunch), the government is printing money which devalue it, there is a trade balance deficit, etc".
That thinking was right, and may be right at the present, but the market looks to the future and price it before people realize the future.
Here is what I see, and the market is agreeing with me on the following analysis.
1. Stock market would ggo down because of recession and lower earnings. The Fed does not have much room to cut interest rates more agressively.
2. Other countries will also cut rates to fight spreading recession, causing interest rate differential between the dollar world and the non-dollar world to shrink. This is bullish for the dollar (similar to dividend increase in stocks).
3. Point 2. will lead to further strength of the dollar because of momentum in currency pairs created by dollar bulls (change of trend in favor of the dollar), and money running to safety to the USA and the buying of assets/bonds.
4. Points 1. to 2. will cause commodities to be less in demand, and therefore a reduction in their perceived price would follow. This will translate in a weaking in futures prices, helped with a strengthning dollar. Once the down trend is established, the bears (and their aunts) will take care of the bear trend in commodities.
The first wave: dollar up, and market down. Commodities afterwards with possible sharp corrections as a beginning to disorient the commodity bulls before the kill by the bears.
Long dollar/short foreign currencies, short US equities and international, and start shorting commodities once a top is comfirmed.
Now that we have a vision, let us explore how the play it to make the most money.
That is the topic of a series of articles to follow.
