Sunday, April 1, 2012

U.S. Dollar Ready To Strengthen Against Commodity Currencies And Oil

The trends in the AUDUSD, USDCAD and oil, which began in October 2011, seem to be at a crossroad. The USD appears to have position to break the trend and strengthen against the commodity related currencies and oil. I also think oil's behavior of failing to press back higher through the broken 3 year trend in Chart 3 is interesting. It's possible that the bullish trend is broken, particularly in the short-term.

Chart 1 (blue line = parity)
1 AUD would buy less US Dollar -> US Dollar strengthens

The Aussie economy is tied heavily to China through commodity trade. As the Chinese economy slows, or at least isn't accelerating as fast, the Aussie will weaken. In the above chart, the price action is carrying momentum down through the trend line, signifying USD appreciation.

Chart 2 (blue line = parity)
1 USD would buy more CAD -> US Dollar strengthens

The Loonie's strength is based on commodity exports similar to the Aussie, although it is more closely linked with oil. As long as the USD strengthens against oil (looked at next) the price action will be able to break higher through the trend line.

The final two charts look directly at oil, which has broken long-term and short-term bullish trends recently. The US Dollar will "strengthen" against oil as the price per barrel moves lower. Basically, $1 will buy a higher percentage of 1 barrel of oil as the price moves down. Take note of the broken 3-year bullish trend which began in 2009 in Chart 3. The price action is looked at more closely in Chart 4, which shows the former 3-year trend providing resistance and the recent bullish trend breaking.

Chart 3 (blue line = $100/barrel)

Chart 4 (blue line = $100/barrel)

I expect the USD to strengthen in the short term against commodity currencies and oil.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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