USDCAD Range 1.3015-1.3182      

USDCAD sank following the FOMC decision but recouped all of its losses almost immediately in what in hindsight proved to be a bizarre move. USDCAD dropped from 1.3180 just prior to the news, touched 1.3077, immediately afterwards and then rebounded back to 1.3180 in a heartbeat.  Asia traders took note of the doveish FOMC statement and sold dollars across the board, including USDCAD, a theme that continued throughout the European session. USDCAD sank even lower than the post FOMC low and currently sits at 1.3050.

USDCAD opened in New York with a negative bias and barely budged on the release of the as-expected Canadian CPI data.

The surprisingly doveish FOMC statement appears to have shifted the driver of US interest rates from American inflation and Labour reports to Chinese data and their economic outlook. Even though the door remains wide open for a rate increase in December, China developments could derail the process in a hurry.

The balance of the day should see a continued bias to sell US dollars although intraday profit taking could slow any losses. The Greece elections and weekend Fed speakers will set the tone to start next week’s action.

Technical Outlook

The intraday technicals are bearish USDCAD while trading below 1.3160 with a break below 1.3010 leading to 1.2960.  There is additional support in the 1.2910-40 zone.  A recovery above 1.3160 targets 1.3230 and suggests that the 1.2960-1.3350 trading band will remain intact.  For today, USDCAD support is at 1.3010, 1.2980 and 1.2950. Resistance is at 1.3080, 1.3130 and 1.3180.

Today’s Range 1.3010-1.3080

Chart: USDCAD 30 minute                                          LARGER CHART

The year-long rally in the U.S. dollar has slowed, but it’s far from over.

From July 2014 to March of this year, the U.S. Dollar Index (DXY) has soared by 25%. Since then, it has pulled back slightly. But the forces that drove the U.S dollar higher remain in place and will intensify in the months ahead.

That means investors can expect a stronger U.S. dollar against most foreign currencies, including the euro, the Japanese yen, the Australian dollar, and the Mexican peso.

It matters because the value of the U.S. dollar holds a pivotal spot in the world of investing.

“The U.S. dollar is the oxygen of the global economy. Everyone takes it for granted, but it determines the value of every financial instrument in the world – stocks, bonds, commodities, real estate, art, collectibles, you name it,” said Money Morning Global Credit Strategist Michael Lewitt.

Why a Strong U.S. Dollar Matters

Specifically, the strong U.S. dollar is the main reason that prices for commodities like oil, copper, and aluminum are down. Because commodities are priced in dollars, a more valuable dollar buys more of them for less money.

The rising U.S. dollar has also hurt the earnings of U.S. corporations with significant overseas businesses. The strong U.S. dollar makes U.S. exports more expensive.

Finally, the strong U.S. dollar has made life miserable for emerging markets. Governments and companies borrowed a lot of money denominated in dollars, Lewitt said. A stronger dollar makes those debts more expensive to repay.

So how can we be so sure the U.S. dollar will keep rising?

Simple, Lewitt said. While the U.S. Federal Reserve has spent the past year winding down its quantitative easing policy, other major central banks – particularly the European Central bank (ECB) and the Bank of Japan (BOJ) – have ramped up their monetary easing.

Such QE policies weaken currencies.

But the Fed is now going against this global tide. Regardless of whether it raises interest rates this week, it has signaled its intent to do so this year or early in 2016.

“Even if the Fed doesn’t move, the ECB and Bank of Japan are committed to further weakening their currencies. That means further dollar strength can be expected,” said Lewitt.

And that’s going to be tough on several currencies in particular…

The Euro, Yen, and Peso Have All Slipped Against the U.S. Dollar

Here’s what the U.S. dollar is doing against some key currencies:

• The U.S. Dollar-Euro Pair (USD-EUR): A year ago, the euro was worth $1.30; now it’s down to $1.12. The euro’s downward trend got a push from the ECB’s first QE program in January. Several big banks, including Barclays Plc. (NYSE ADR: BCS) and Bank of America Corp. (NYSE: BAC) have forecast the euro will drop to parity with the U.S. dollar by the end of the year and will fall below the $1 level in 2016.
• The U.S. Dollar-Yen Pair (USD-JPY): As recently as October 2012, $1 was worth 80 Japanese yen. Now $1 is worth more than 120 Japanese yen. That’s a 50% change in three years. The BOJ’s determination to further weaken the yen is expected to drop it to 130 against the U.S. dollar by the end of 2016 and 140 by the end of 2017.
• The U.S. Dollar-Yuan Pair (USD-CNY): The Chinese government shocked the world in August when it loosened some of its controls on the yuan, causing it to plunge 2.1% in a day. The Chinese yuan is down 2.6% against the dollar for the year. According to a CNNMoney survey of economists, the Chinese yuan will fall another 2.8% against the U.S. dollar by the end of 2015 and further still in 2016.
• The U.S. Dollar-Peso Pair (USD-MXN): The Mexican peso is down more than 21% against the U.S. dollar over the past 12 months. The Mexican peso has been slammed by the big drop in oil prices, forcing the Mexican central bank to sell U.S. dollars to try to prop up its currency. But here the worst is over. Forecasts call for the Mexican peso to stabilize then gain a little ground back from the U.S. dollar in 2016.
• The U.S. Dollar-Australian Dollar Pair (USD-AUD): The Australian dollar has been hit by that nation’s exposure to a slowing Chinese economy as well as the plunge in commodity prices. The Aussie dollar is down about 22% against the U.S. dollar over the past year. It’s currently at about $0.71 to USD $1. ANZ Research predicts the Aussie dollar will slip a bit further – possibly as low as $0.60 – before recovering back into the low $0.70 range next year.

What Investors Can Do About the Strong U.S. Dollar

“Investors can profit from the dollar rally by investing in dollars and selling short euros and yen,” Lewitt said.

He suggests three ETFs:

• Buy the ProShares DB US Dollar Bullish ETF (NYSE Arca: UUP), which closely tracks the exposures in the DXY. This ETF rises when the dollar rises.
• Buy the ProShares Short Euro ETF (NYSE Arca: EUFX). This ETF rises when the euro falls.
• Sell short the Guggenheim Currency Shares Japanese Yen Trust ETF (NYSE Arca: FXY). This short position will rise in value as the yen weakens.
• Buy the ProShares Short MSCI Emerging Markets ETF (NYSE Arca: EUM) to profit from continued weakness in emerging markets. This ETF rises when emerging markets stocks weaken.

Someday, of course, the U.S. dollar will collapse from the weight of the $18.4 trillion U.S. national debt and the more than $4 trillion the Fed added to its balance sheet through several bouts of QE.

But for now, it’s time to profit from a stronger U.S. dollar.

I would say without a doubt the most lopsided trade in the world right now is the long dollar trade. Virtually everyone has become convinced that the dollar is going to 110, 120 or even 160.

Folks when everyone is thinking the same thing … then no one is thinking.

So let’s take a look at this “one way” trade.

If the dollar is going higher then it goes without saying that it should continue to make higher highs and higher lows. That is the definition of a rising market. But last month the dollar not only broke the triangle consolidation pattern, but it dropped below the intermediate cycle low in May. That is a failed intermediate cycle. Failed intermediate cycles generally only occur when the larger multi-year cycle is in decline.

Next let’s look at the two largest weighted currencies that make up the dollar index, the euro and yen.

For a currency that we’ve been told is going back to par, I have to wonder why it’s making higher intermediate highs & higher lows, regained the 200 day moving average, and broken the year long down trend line.

The same thing is manifesting in the yen. A major multi-year down trend line has been broken and the 200 DMA recovered.

If these two currencies are bottoming then the dollar is topping.

Next let’s look at a long term chart of the dollar. At the recent peak earlier this year the dollar had retraced almost 62% of the previous bear market. The bull in the 90’s retraced about 50% of the previous bear before rolling over. This bull is almost 8 years old and it may very well be time for the next bear market to begin.

Now let’s go back and take a closer look at the dollar cycle. First note that the last intermediate cycle low occurred in May. The most recent low occurred in August on week 15. Week 15 is generally too early for a final intermediate cycle low. They usually take 20-25 weeks before bottoming. Also note that the dollar has not been able to recover the 10 week moving average.

This is suggesting that the dollar isn’t done going down yet. It should have at least one more smaller daily cycle down before the larger intermediate cycle bottoms.

Now let’s go to the daily charts and we see that indeed the current daily cycle appears to have topped on day 8 having failed multiple times to regain the 50 DMA. A top on day 8 indicates a left translated cycle is now in progress. Left translated cycles almost always drop below the previous cycle low. That means the dollar is now highly likely to fall below the August lows.

Now here’s the thing. Almost no one is prepared for the dollar to drop. Everyone is convinced the dollar is going higher, and everyone is positioned long. Everyone is on the same side of the boat. When that happens invariably the boat tips over. 

So here’s what I think is going to happen. the dollar is going to continue down in this left translated cycle, and at some point its going to break through that August low. When that happens the currency markets are going to panic because no one is prepared for the dollar to drop. It will trigger a waterfall decline that will at the very least test the breakout at 88-89. But it may be worse…

As I have noted before intermediate cycle lows in stocks almost always correspond with either a top in the dollar cycle or a bottom, then we can probably assume that the final 7 YCL in the stock market is going to occur in conjunction with the crash in the dollar.

And as the Fed continues to intervene in the markets they are virtually guaranting there will be a second crash in October. I’ve said all along that all the interventions this year to prop up the stock market would just cause a crash, and sure enough that is exactly what has happened. They haven’t learned their lesson and further interventions will just exacerbate the next leg down.

If the second leg down is as large as I think it will be (possibly testing 1550 on the S&P) then the dollar may not stop at 88-89, but could drop to the next support zone (85) in an all out panic.

Now you see why I think that commodities may have found their 3 year cycle low. 

The next leg of the commoditiy bull market was never going to be driven by fundamental supply and demand. It was always going to be driven by the currency markets. So it makes no difference if there is an oversupply of oil. All that matters in the years ahead is that there will be an even bigger oversupply of global currency units. While all commodities should benefit, gold and silver should benefit the most, and the mining stocks are now in position to generate one of the largest bull markets in history.

Remember the larger the bear market, the larger the bull market that follows. The juniors are down 90% and the majors 84%. Without a doubt this has been one of the most destructive bear markets in history. It’s going to spawn one of the largest bull markets any of us will ever see.

Gary Savage, Smart Money Tracker

USDCAD Range (since Monday) 1.3211-1.3307    

USDCAD rejected attempts to take it above 1.3310 overnight and it has given back all of its gains since yesterday due to a general US dollar retreat against the majors, with the exception of both JPY and CHF. In addition, a bounce in WTI prices from $44.15/barrel to above $45.00/b helped the Loonie’s rise.

Overnight, it was a mixed bag of news and data that attracted attention but provided no lasting US dollar direction.  USDJPY rallied early but that move wasn’t sustained. China’s trade data was viewed as weak as exports declined 5.5%, even though the trade balance increased. China’s equity indices closed in the green which helped global risk sentiment.

There is a lack of data today which suggests FX trading will be governed by equity market moves.  USDCAD will continue to pay close attention to WTI while positions get adjusted ahead of tomorrows’ Bank of Canada interest rate decision and statement.

Technical Outlook

The intraday rally rejected gains above 1.3300 and subsequently reversed.  The break below 1.3260 points to further losses to 1.3180, representing the ragged, mid-August uptrend line.  A break of 1.3180 suggests a steeper drop to 1.3150 and then the 1.3100-10 area. A move above 1.3350 would target 1.3450.

Today’s Range 1.3180-1.3260

 Chart: USDCAD 1 hour with broken intraday uptrend shown      Larger Chart