Above is an update of the USD index following on from my post http://you-buy-the-high-i-sell-the-low.blogspot.com/2009/01/usd-index-chart-will-reversal-pattern.html. Technically the reversal pattern has been triggered as both the neckline and last November's high have been broken. However, I cannot help but think about analogies with the Japanese Yen. The Yen is currently being sold off as it is realised that a strong currency is inconsistent with the economic statistics. Also Japanese investors are not repatriating in anywhere near the volume that they have been recently. This leads me to conclude that deleveraging is perhaps slowing down. Thus, can we assume that real flows due to deleveraging are likely to diminish in other currencies. It is my opinion, that if we make this assumption, then it is hard to justify that the pattern described above will meet its objectives, in the sense of a clean technical projection (although it may happen over a prolonged period when the pattern may no longer be valid). I personally favour a period of USD weakness before further strength may resume.
I highlight the USD index here as I feel that so much in the markets are reliant on the movement here. Further USD strength will most likely trigger more losses in the S&P 500, due to the effect on repatriated cash flows by US companies. This will probably drag down other equity markets. So Dollar bulls, like Yen bulls, should be careful what they wish for, as excessive dollar strength is inconsistent with a realignment of the US economy to net exports. I do however appreciate that someone must have a strong currency if counties like Japan and Germany have weak ones. The global economy is still dominated by the US, although not as it was say 10 years ago, so recovery there is still paramount if any place else is to see stability.
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