Dollar Rally a Fake or Inside Strategy? Busy Week Ahead

As you can probably tell by now, the dollar has been a prime focus of this blog these past few weeks. Certainly as the currency war and Fed talk have occupied market reactions. Staying consistent with my view that expectations of a dollar rally are too high, there must have been some underlying reason for the sudden surge in the US dollar against other currencies as the global markets opened a while ago. Check out the screen-shots from DailyFX, including my own trend analysis of the dollar v market cross:



The drop definitely caught my eye. For a second, I thought the analysts were right, but the fundamentals always come to light. Moments later, the market corrected this rally and forced prices back to previous levels. Fellow trader, Kendall Huang provided a possible reason for the surge in volatility that pushed the dollar higher: big banks and hedge funds understand the fundamentals and are clearing the way for a short strategy. It makes sense to inflate the dollar to get in at a top, only to short as the market reacts to strengthen the artificial move. Now, the sudden correction probably interrupted this strategy, but certainly as the week begins, and as analysts anticipate a rally, the opportunity to short is ever more leveraged...just give it some time.

This week, the most important event will be Wednesday's FOMC meeting and Friday's Non Farm Payroll report for the US. Australia and Britain are expected to leave rates unchanged. Most important, China's PMI on Monday is likely to move the Australian dollar. Analysts expect no change, but watch this closely - it might drive the Australian dollar heading to the RBA announcement. If there's little movement, use the Aussie and Euro to combat the dollar (FOMC and payrolls). I anticipate the dollar to weaken, but if it does strengthen, you'll be able to spread your positions. I'll continue to blog throughout the week.