"It is easy to be brave when far away from danger." ~ Aesop 620-560 BC, Greek Fabulist

The Fed was pushed to aggressively lower rates due to the so called credit crunch and sub prime mortgage crisis. The first series of cuts drove the dollar to a new low towards the end of Nov 07 and it looked like further rate cuts would have the same effect. We openly informed our subscribers that we were looking for the opposite and expected the dollar to mount some sort of rally. In fact we even published an article in Dec alluding to this fact The Dollar

The surprise 75 basis point rate cut in January hardly impacted the dollar; one would have thought it would have spiralled downwards and gone on to put in a series of new lows. If this was not enough a few days later another 50 basis point rate was announced and all the dollar did was test its lows. Logically one would expect the dollar to trade to a lower point than it was the last time rates were lowered; instead the dollar is trading significantly off its lows and higher than it was when interest rates were higher. Note that a high interest rate environment does not necessarily correlate to a stronger dollar. During the late 1990's interest rates were rather low but the dollar was trading at very lofty levels.

This action by the dollar indicates that it is ready to mount some sort of rally; if a market fails to react to what would normally be very negative news then its time to be bullish. In fact we have been stating for quite sometime now that a dollar long would make sense.

If you compare the Dollar to all the major currencies it has actually gained strength against all of them in the last few weeks; the last one to join the pack was the Euro. After trading to a high of 1.4921 on Jan 15, it has started to drop. Now one would have expected such a massive rate cut to propel the Euro to new highs, instead we find that while it rallied it is still below its high of 1.4921; it rallied up to 1.4848 before pulling back. In terms of currency pairs (EUR/USD) the fall from 1.4921 to the present level is a huge move. The same applies to the British pound, New Zealand dollar, Australian dollar and so on. The only two currencies that this does not apply to are the ones that we have been recommending to our subscribers now for quite sometime; both are up significantly.

This chart clearly illustrates our point. Each time rates were lowered the dollar ended up trading higher instead of lower; after putting a low back Nov 06 it has refused to trade below this zone again. In addition to having a huge intra market positive divergence signal (lower interests and dollar trading higher) we also have a full fledged positive divergence signal on the daily charts. Once again something large is brewing up and it's hard to say how high the dollar will trade but we know one thing markets these days have a tendency to overshoot on the downside as well as the upside. Thus the dollar will probably trade to a higher level than most can envision. On a separate note we feel that the Euro is overpriced by a factor of 20-25% as the Euro zone is also experiencing economic woes and at some point the central bankers will have to decide between stimulating the economy and or fighting inflation.

All charts provided courtesy of www.prophetfinance.com.

After putting in a high of 110 the Canadian dollar has pulled back rather strongly. The 3 year chart above shows just how strongly the Canadian dollar has rallied in the last 12 months. Almost 12 months before the rally began we mentioned that when this chap moved it would move with a fury and that's exactly what it has done. However in the intermediate time frame (9-15 months) we are no longer as bullish as we once were on the Canadian dollar. It would make for a good investment if it were to test the 90-93 ranges again. Furthermore it looks like it has broken its main up trend line.

"You have to leave the city of your comfort and go into the wilderness of your intuition. What you'll discover will be wonderful. What you'll discover is yourself." ~ Alan Alda 1936-, American Actor