Dollar consolidates, 10-year bonds rally to new high

By George Albert

The US dollar consolidated and the treasuries rallied despite the potential of a US credit downgrade and possible default. Many market players had expected the Dollar and bonds to sell off strongly given the downgrade and default threat.

A look at the Dollar index chart shows that the greenback is right where it was last week. The dollar is now moving sideways after displaying bullishness. We had mentioned that the dollar was at a support level and likely to bounce. But given the overhang of negative news, the greenback did not rally. However, it did not break the support level and sell off. The support levels we mentioned last week were between 73.50 and 74 with next level below between 72.25 and 73. The dollar index stayed within the first support level of 73.50 and 74, to close at 73.90 on Friday. View Chart

[caption id=“attachment_50969” align=“alignleft” width=“380” caption=“The dollar was not affected by the credit downgrade and debt default threat last week. Getty Images”]  [/caption]

This clearly shows that the dollar was not affected by the credit downgrade and debt default threat last week. The dollar bears have to clear several support levels to continue on the bearish trend. The inability of the greenback bears to push the dollar down is an indication that market is getting increasingly risk averse, as seen by the sell off in equities. In last week’s article we had predicted the sell off in the equity markets.

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The other indication of increased risk aversion in the financial markets is the rally in US treasuries to a new high. (View Chart) Remember that rally is despite the fact that rating agencies have threatened a downgrade of the US. A rally in the treasuries signal a further sell off in equities. But we would proceed cautiously on selling or shorting the equities as they are now near key support levels. In the coming week, it’s best to trade cautiously given the US political wrangling over the debt limit increase.

Gold

The precious metal continues to rally in a slow and steady fashion, indicating a confident bull. Note that when the prices move up slowly, it is difficult for bears to push down prices as at each key lower level there are buyers who missed the rally willing to take positions. As a result any sell off is met by a rush of buying, which takes prices higher.

Fundamentally speaking gold right now is the best safe haven. The other safe havens are the US dollar and treasuries. However, given the fiscal and economic situation in the US, gold seems to be emerging as a safe haven of choice.

Copper

In the previous article we had mentioned copper facing headwinds due to strong resistance areas close to current price. Resistance areas are levels where prices reverse and fall or at least stop advancing. Even though the prices of copper did not fall, it did not rise either. On the UBS copper index, the level of resistance is between 485 and 490. The index closed at 477 on Friday. A sell off in copper from resistance can lead to a further sell off in equities. But copper has some more to rally.

George Albert is a Chicago-based trend watcher and edits www.capturetrends.com