Trading the Dollar Index this Week 06-10-2014

The record-breaking dollar rally of 12 weeks seems to be still intact. Furthermore, we ended last week with a better than expected non-farm payroll number which fuelled a further rally. Here we are seeing an extreme overbought condition of the dollar.

USD weekly bull trend

(Click the image to view it at higher resolution)

The temptation is that of calling a top and start selling. However, doing so would be like standing in front of a train which doesn’t seem to slow down, in other words is not a smart idea. In fact, when in overbought condition and even more when over a RSI level above 70 a bull trend is the strongest and fighting it is definitely the last thing you want to do. 

USD level to breach


(Click the image to view it at higher resolution)

So what should we do?Buy Dollars?Well that’s risky too, because buying at such high price is not really a good deal. Moreover the risk is of being caught on the wrong side of trade. I would rather take a “wait and see”  kind of approach. Before opening any trade I will wait for an objective trigger. To sell dollars I would wait for the DAILY RSI of the dollar index to break below 70, until then selling dollars is out of question. Today the dollar is retracing a little bit, surely this is due to profit taking but it will be interesting to see if we will close above or below the opening range of October, this may give already a first clue about where this market is heading in the coming weeks. If I see a bounce I might even buy dollars against something that is showing weakness like the euro. However, I would feel more comfortable in selling dollars as this condition is extreme and I don’t think such high value reflects the fundamentals and here is why:

Good US economic data often influenced by seasonal adjustements:

Although the US is definitely in a better shape than its european trading partners not everything is as good as we think. Often the data we see are distorted by seasonal adjustements and economic surveys often are overly optimistic when compared to real data. This is probably something that was done in view of the US november elections, if bubblevision says that the economy is in good shape, the current amministration will claim they have done a good job.

The job data was good on the surface, but not that much when we dig into the details:

Although the unemployment printed much lower than expected at 5.9% we must consider that the participation rate was at a record low level. In fact, about 92.6 million people in the US are not in the labor force!!

participation rate sept 2014_0

Moreover, despite 248K jobs were added into the economy, most of the people that have been employed were between 55 and 69 years old, not far from the retiring age!! And most of the jobs were low wage jobs!!! Not exactly symptom of a healthy economy!!

Age September_0

Young people in US are still struggling to find jobs and most of them are unable to borrow more money as they have to repay student loans!!

55 older younger_0


Another thing I would like to point out is that the civilian labor force in September 2014 was 155.9 million (over a working age population of 248.4 million) while in October 2008 was 154.9 million (over a working age population of 234.6 million). At a first glance it seems in September 2014 we have 1 million more people employed  than in October 2008, pity the overall working age population increased of 14 millions!! You do the math…

However, the market does not always see what we see and we must trade following the trends that the market is giving us, good luck trading!!

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