Please refer to the following scenarios illustrated on the U.S. Dollar Index (figures one through four): Technically, the USD looks very bearish until our recent, inner trendline breaks and supports a rally from the 10370 through to the 10500 level. There is hope after all, but the USD needs a firm close above 10600 to regain a bullish outlook. U.S. economic data has been supportive of the USD with a recent high at 10516, recapturing the nasty bearish rejection from the Non-Farm Payroll fake out in early May.

Another scenario may be to avoid USD pairs and look for higher yielding currencies – such as the Australian dollar or New Zealand dollar versus most counterparts; this could be a wise choice as the interest rate differential is significant (2.5 percent and 3 percent respectively). Scenario three includes commodity-based currencies such as the AUD and CAD which trade closely with futures, gold, and oil.

Despite the doom and gloom messages resonating throughout the financial community, there is opportunity whether we start seeing positive or negative outcomes of this bill on the USD. The Forex market is a great avenue for exploiting imbalances in the currency world because of the strong trends that they create. For example, when the Bank of Japan’s aggressive monetary policy shifted and the JPY depreciated in one of the strongest trends we have seen since 2008 (see figure five). The Forex market allows traders to buy and sell currencies depending on this trend, so it is wise to look for the largest movement and exploit the strongest versus the weakest currencies, even if that is at the expense of the USD.

The beauty is, a technically-savvy trader will be able to see this and potentially profit from it, which is much wiser and more prosperous than the “head in sand” approach. Whether this bill is the tipping point or another Y2K scare, the time to prepare is now. As with any crisis, when the dust settles, there will be winners and losers; we all know which side we prefer.

Chris Pulver

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