US Dollar Index Looking Strong

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Uncertainty over this week’s March 1 deadline to avoid automatic U.S. spending cuts may temper any rally to new highs this week for the SP 500, even with an impressive rebound all the way from below 1500 to 1525 this morning (MAR13 contract). Once hitting the key level of 1525 however, the market sold off 10 points very quickly, thus indicating to us a sort of nervousness in the bull camp. 1530 remains the key resistance, and we don’t see the market rallying higher than this level before any type of conclusion is found with the upcoming spending cut deadline. 1460 remains our key support level for the SP 500.

Precious metals have started off the week on a positive note, with silver futures rebounding $.52, or +1.83%. Gold futures are up almost 1% to $1585. To us this seems to be profit taking by the bears. One other bullish stimulus to precious metals could be the fundamental impact of the Bank of Japan’s ultra dovish monetary policy.

We focus more on the US Dollar Index. We have seen some big moves in the foreign currency markets recently. First of all, the British Pound has gotten clobbered recently, trading from above 1.58 down to 1.51 just this month. The Canadian Dollar has also taken a hit by bears this month, trading down from 1.00 to a recent low of 97.34 today. And of course, the JPY is making any Yen bull look foolish, as it keeps dropping, hitting a new low for the move at 1.0600 this morning.

Our fundamental view is that the US dollar will continue to rally against its foreign currency peers, as the US potentially winds down or diminishes its recent QE activity, while other central banks around the world either continue it for longer or actually start up QE policies of their own. We call this the QE Cascade. We believe the US dollar index will rally to its 2012 high of 84 and perhaps beyond that level. If this occurs, we believe key commodities such as gold and oil will drop with the US Dollar rally.

US Dollar Chart

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