3 Reasons Why the Dollar Could Rally

Ding ding ding ding! It’s back to the charts for U.S. traders! Before you place your trades today, check out why I think the dollar could rally over the next couple of days.

1. Post-Hurricane Dollar Rally

A post-hurricane what?!

Lemme explain. In times of calamities, money usually finds its way to the public through insurance claims. The money will then go back to the economy as people use their claims to replace or rebuild what they lost. Temporary jobs might even be created as demand for handymen, builders, and other similar jobs shoots up.

This time around insurance companies are projected to pay $10 to $88 billion in damages from Hurricane Sandy. That’s a lot of money suddenly pumped into the economy! But will the dollar demand have an impact on USDX? Let’s take a look at what happened in 2005 when Hurricane Katrina hit the U.S.

USDX Hurricane Katrina

As you can see on the chart, USDX dropped sharply 3 days after Hurricane Katrina made its landfall. But a few days after that, USDX also rallied. In fact, the dollar strength didn’t let up until November, 3 months after the hurricane hit the U.S.!

Of course, a lot of factors could’ve contributed to the dollar’s rise at the time. But it’s not hard to imagine that rebuilding efforts also helped.

2. Double bottom on the U.S. Dollar Index?

Speaking of rallies, the U.S. dollar index seems to suggest that a strong upward move is coming soon. The daily chart shows that a double bottom–a bullish reversal chart pattern–has formed.

USDX Double Bottom

3. Return of safe haven demand?

The Troika, which is composed of representatives from the European Commission, the European Central Bank (ECB), and the International Monetary Fund (IMF), is going to hold a conference call later today.

They’re supposed to talk about the sustainability of Greece’s debt, but many market participants are expecting the conference call to be a bust. They don’t expect any meaningful decisions from the Troika yet, as not enough research has been done on Greece’s current situation.

Another issue that could trigger investors to seek the safety of the dollar is Germany’s disappointing labor market data. According to the data, the number of unemployed people rose by 20,000, double the amount the market had initially expected. In addition, the unemployment rate was reported to have remained at 6.9% in October.

2 comments

  1. RB

    I’m under the impression there are a lot of retail investors that are ignorantly long USD. It’s definitely at an interesting level (longs appear to have a better R:R at the moment).

    I wonder about a couple things though. Does $80 billion in insurance matter if the Fed is buying more than that every month from the banks? Is the US in good enough shape yet to rally on fundamental strength? Or is it simply the risk-off haven currency still?

    I’m split between the “USD-haven is here to stay” and “USD is bubbling” camps. I.E. trading more technically than normal (long USD short/med term)

    Reply

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