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“Before I speak, I have something important to say.”
                                    Groucho Marx

Commentary & Analysis
Being right and acting right….Did I say “long term?”

I hope I mentioned the word “long-term” several times when I sent you the long-term dollar index chart last week with my best guest attached for a dollar rally. Mr. Greenie is getting smoked today. Why? Well, too many people were long dollar and short euro decided to reverse their position is likely why. And maybe there is more….

I received an email on Friday from a man who lives across the pond and whom I highly respect. A man I would categorize as “forgetting more about currencies and currency trading than I likely will ever know.” Yes, in my book, he is the Babe Ruth of the currency world. So to put another way during this baseball playoff season, “I couldn’t carry his jockstrap.” So naturally I was a bit concerned when he quipped:

This may be a time when it’s better not to think hey! this is the beginning of something or hey! this is the end of something, but hey we’re seeing a dollar rally in a bear trend, and a euro in a bear trend – with fit currencies strong but on a risk-off phase. Let’s see.

My response was to him was that I too was quite concerned about that point indeed, and why confidence in my best guess waxes and wanes. And ultimately, imbedded in my best guess is the idea that China can’t avoid a serious growth slowdown that could significantly change the shape of the global macro environment. As least that was the crutch I threw to myself.

I know better than to try this on the Babe, as it is he who said many years ago that forecasting was a mug’s game and one who trades currencies should swear that off entirely if one wanted to survive long term. He said the best we can do is get a handle on current sentiment and the setup condition that help us boil the question down to a yes or no and not get paralyzed by our own analysis, or that of others, no matter how sophisticated we think we might be.

On that score, I did say to the Babe that I thought the near-term setup conditions pointed to dollar weakness, and our subscribers have been playing it that way, and doing well the past couple of weeks.

In that vein, another look at dollar index today, this time a daily chart:

Correcting on cue as it is. But that said, with the Joker of the market (Babe’s words) lingering happily in the background, this view cannot be considered a done deal either. This view is the “it’s all good” now in the eurozone, the leaders are finally going to construct that “ringed fence” to keep that nasty contagion at bay. Simple!

So, is it really the ringed fence or purely a near-term sentiment swing in a deeply pessimistic extreme in the euro?

Commitment of Traders Report – Numbers for punters from October 4, 2011…

Bullish: 18,104 contracts 15%
Bearish: 100,801 contracts 85%

Quite possible these numbers moved more euro-bearish last week. The Babe would call that a “sentiment extreme” or at least a “flashing yellow light!”

And we wake this morning to a huge rally in the euro. Is it Morning in the Eurozone (sorry Ronny), or what markets do–throw off their riders, especially the Johnny-Come-Lately variety?

Well, I won’t guess. But I think you know what I think. I will also share with you a comment a friend made to me this morning via the telly. This friend, another whom has had a distinguished career, is a real heavyweight and shall remain nameless. He knows many of the eurozone leaders on a first name basis (flattered and surprised when he calls me), today he said: “XXXX told him this morning that radio silence out of Athens, and other contacts, suggest the deal between Sarkozy and Merkel was essentially this: They will let Greece default and do all they can to save the rest of the club. Just thought you’d like to know that…”

So, we may get a test of the strength of that “ringed fence” soon; and maybe get another chance to sell the euro at a higher price…as soon as a few more riders jump aboard the rally of course. This is really getting fun.

Happy Monday!