Don't look now, but the dollar is making a turn which could have a serious effect on the markets and commodities. Since the algorithms control financial markets, a rising dollar will inevitability lead to a decline in stocks and other risk assets.
It all occurred on 5/5/11 when for no good reason the dollar started to surge. While this move has been dismissed by the experts as nothing more than a dead cat bounce, they fail to take a look at the volume accompanying the move. This upward reversal for the dollar came on heavy volume which usually correlates to a change in market direction.
The chart above is the EUR/USD pair which is the most traded and followed of all of the dollar pairs. It also makes up the majority of the dollar index. See the constant volume for the past few months. All seems well. Fed money printing has allowed the Euro to steadily rise against the dollar, despite the fact that the EURO itself is on the verge of collapse. Then, beginning on May 5th, their is a massive volume spike which coincides with a massive 300+ pip plunge in the EUR/USD pair. As most market observers know--volume equals conviction even our algo controlled/manipulated market. It appears tha the big boys are buying the dollar and covering their very profitable shorts.
The Bottom Line: This reversal in the dollar has the potential of catching most of the world off guard as everyone and their aunt is now short the dollar with 30-1 leverage. After all, the fundamentals point to a decisively lower dollar, thanks to the Fed's ZIRP and non-stop money printing (back door bailout to the banks).
Below is a chart of the UUP--a ETF which tracks the dollar index. You can see that there has been huge volume spikes accompanying the price reversal. After the initial move, the dollar is now taking a brief pause for another move higher. First target is clearing the 50 day moving average. This will help get the technically inclined algos to get on board. With the price above the 50 day, the dollar shorts will start to cover and in the process encourage some predator HFT algos into lifting the price as they front run larger orders and presto: a dollar reversal. Fundamentals be damned!
Black Swan Insights