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The Legion of Doom
The weak greenback is a cause for celebration for the enemies of the U.S., and now Venezuelan President Hugo Chavez is weighing in on the falling U.S. Dollar. "Soon we will not talk about dollars because the dollar is falling in value and the empire of the dollar is crashing," said Chavez on November 19. "Naturally, with the crash of the dollar, America's empire will crash". At the time of his statement, Chavez was visiting another one of America's best buddies, Iranian President Mahmoud Ahmadinejad, in Tehran. At an OPEC summit in Saudi Arabia over the weekend, Ahmadinejad hinted broadly that oil would soon be traded in currencies other than the U.S. Dollar, such as the Euro. Mahmoud said, "All participating (OPEC) leaders showed an interest in changing their hard currency reserves to a credible hard currency. Some said producing countries should designate a single hard currency aside from the U.S. dollar...to form the basis of our oil trade". When asked to comment, Ahmadinejad said, "They get our oil and give us a worthless piece of paper." The dollar has lost 15 percent of its value against the euro in the last 12 months.
As a final compromise, OPEC leaders agreed that the group would look at pricing oil with a basket of currencies, which would reduce volatility of prices but would further weaken the US currency. Saudi Arabian Foreign Minister Prince Saud Al-Faisal rejected the calls by Iran and Venezuela to discuss abandoning the U.S. currency for oil sales, saying the kingdom doesn't want the dollar to "collapse." Gee, that's encouraging!
Please be sure to clip and save the above quotes from Chavez and Ahmadinejad for the next time that someone tries to tell you that a weak dollar is a good thing for the United States. We are bringing joy to some of the worst political figures imaginable and reinforcing their positions of power via our inability to manage our own currency. As I mentioned last week, Americans should make the weak U.S. Dollar a campaign issue for 2008. Let's ask every Presidential candidate where he or she stands on the weak dollar, and what he or she plans to do about it.
Hanging By a Thread
The greenback has been thoroughly beaten down by most of the world's major currencies, but has still managed to hold its ground against its fellow punching bag, the Japanese Yen. Well, all of that may finally be about to change, as the USD/JPY currency pair has slid to a major support level near 109.00. This area acted as support in 2005, 2006, and now again in 2007. Will it finally break this time? Probably. If it doesn't happen now, it's likely to occur in the near future. The Fed is still contemplating interest rate cuts, which tend to weaken the dollar, while the Bank of Japan appears to be firmly on hold at a benchmark interest rate of 0.5%. In addition, the seemingly endless credit crunch favors the Yen, as there is a strong inverse correlation this year between equity markets and the Japanese currency. In other words, when U.S. and other world stock markets fall, the Yen tends to rally. If we are to believe Goldman Sachs, one of the few financial investment companies that appear to have weathered the credit storm unscathed, we are not out of the woods yet. On November 19, Goldman cut Citigroup to a "sell" rating, saying that the huge lender has most likely understated its losses due to the subprime mess. If equities react poorly as the subprime shoes continue to drop, it might be time to shout 'look out below' for USD/JPY currency pair (see figure 1).
Figure 1: USD/JPY inches closer to major support near 109.00. Source: Saxo Bank
If this puppy breaks down, where is the likely support level? Those of you who were trading currencies in early 2004 might recall that the Bank of Japan (BoJ) actually intervened in the currency market, creating a huge support level just above 105.00. The BoJ first prevented the currency pair from dipping below 105.00, and then drove it higher for three weeks, with the move peaking at 112.00. This was such a powerful and unforgettable event, in terms of both technical and psychological impact, that traders are likely to get spooked if and when the 105 handle reappears (see figure 2).
Figure 2: BoJ creates a floor in USD/JPY at 105, and then rips it higher. The 109.82 area represents the current exchange rate as of Nov. 19, 2006. Source: Saxo Bank
Chuck Norris-ism of the Week
You asked for it, so here it is – this week's Chuck Norris-ism.
Chuck Norris doesn't target inflation. He roundhouse-kicks it until it begs for mercy.
Media Minute
I received a lot of emails and kind comments from readers about my interview last week with Maria Bartiromo on CNBC. I've had the opportunity recently to spend time with some great people in the media, and the thing that always strikes me is the kindness and respectfulness of the people at the top business media outlets, both on air and off. Every single individual that I've dealt with at Fox, CNBC, CNN, and the BBC have been consummate professionals and class acts all the way. I guess the people at the top of the media food chain can afford to be big-hearted, while the people at the bottom – well, they're at the bottom. 'Nuff said.
I Love New York! Pop quiz – which Online Trading Academy location was voted Franchise of the Year for 2007? Why, New York of course! John Bang, Tony Michaels, and the whole gang at Online Trading Academy of New York would like to invite you to attend a free seminar and book-signing event with me on Wednesday January 9, 2008. Hey, what else would you expect from the Online Trading Academy's Franchise of the Year? Mark your calendars and don't miss this event - I can't wait to see all of my friends in the New York area!
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through