US Dollar's slide should be halted

Tonight, the Fed will meet to decide whether to have another interest rate cut. There are many observers who believe that further rate cuts will exert more pressure on the US Dollar, which has been sliding for the past 2 years. A Fed decision to keep interest rate unchanged or to cut interest rate by 25 basis points (accompanied by a statement that it will be the final rate cut) could help US Dollar in the short-term. For more on US Dollar weakness, check out this article, US Dollar: The next shoe to drop by Manu Bhaskaran, which appeared in the Edge, this week.

From Chart 1, you can see that the USD index has dropped from 92 in November 2005 to a recent low of 72. The MACD indicator is poised to hook up. A positive news on the interest rate front, as discussed, would help. A rebound could possibly put the USD index up to 75 and maybe 78.


Chart 1: USD Index chart as at April 28 (Source: Stockcharts.com)

In my opinion, the weak US Dollar is one of the main factors driving the current bull run for many commodities. A reversal in the US Dollar could lead to a correction in commodity prices. From Chart 2, we can see that the CRB index has recovered from its recent correction & is now revisiting its March high again. You can see that CRB's MACD indicator is poised to hook down.


Chart 2: CRB Index chart as at April 28 (Source: Stockcharts.com)

Crude Oil- presently the most bullish commodity play- has been matching up strongly after breaking above the strong psychological resistance of USD100. The current accelerated uptrend, starting from February this year, has chalked up a gain of USD35 (from USD85 to USD120). This surpasses the gain of USD30 recorded in the earlier accelerated uptrend in July-November last year (from USD70 to USD100). As such, the current run-up is quite extended & players may look for excuse to lock in some profit.


Chart 3: Crude Oil Index chart as at April 28 (Source: Supercharts by Omega Research)

Soya Oil & CPO, which had benefited from the strong run-up in Crude Oil, had recovered some ground, lost in the recent sharp correction. Nevertheless, one can see clearly that the recovery is lagging in pace when compared to Crude Oil. A sharp correction in Crude Oil could lead to similar correction in Soya Oil, whereby the latter may test its recent reaction low of 50. A break of this level could send Soya Oil to its long-term uptrend line support of 43. See Chart 4.


Chart 4: Soya Oil Index chart as at April 28 (Source: Supercharts by Omega Research)

Similarly, CPO could also re-test its recent reaction low of RM3000, and if this level is violated, it may test its medium-term uptrend line support at RM2850-2900. See Chart 5.


Chart 5: CPO's daily chart as at April 28, 2008 (source: ifs.marketcenter.com)

I believe that the Fed is very concern about the continued slide in the US Dollar. They, and almost every governments out there, should be worried about the continued rise in the price of basic commodities, especially food items (such as rice & wheat). The recent riot in the Philippines, due to the shortage of rice, could be a harbinger of more trouble ahead, if nothing is done to check the continued rise in commodity prices. Checking the slide in the US Dollar could be the starting point, as most commodities are priced in US Dollar.

Note: The FOMC meeting was scheduled for Wednesday, not Tuesday.