The Best Current Short Dollar Trade Currently in the Market

All may seem calm to the casual observer, and there may even be indications of a recovery: the Dow and S&P have outperformed Treasury bonds and precious metals, and the dollar has remained stable. Is this the beginning of a new bull market? Is it time for permabears to pack it up and go home? The chart below illustrates the situation.

To my fellow permabears: fear not, for contrary to what the always happy-go-lucky bulls may think, this is simply a rally within a bear market. Short-term traders may find it enjoyable, but the buy and holders? Well, now remains a good time to continue accruing precious metals.

But for traders like myself who are always looking for opportunities to trade their long-term perspective, know that the market is currently giving us a very good opportunity. Inflationists/Dollar bears have been eyeing commodities, and on the Australian dollar and the Canadian dollar -- currencies closely correlated with commodities.

Check the chart below on the Australian dollar.

And the chart below on the Canadian dollar.

Trading This Setup

I've already entered a short USDCAD trade, and will be scaling into this position as it moves in my favor. I would like to see a test of the 1.05 area. I'll add on the break below each key level, and will close out if there are signs the trend has reversed or is stagnating.

Simit Patel
Discuss On InformedTrades

The Case for the Australian Dollar as a Long-Term Trade

One of my favorite currencies on a three year outlook is the Australian dollar. There are three reasons for this:

1. In light of the increase in US government spending and the diminishing tax base, I think substantial dollar devaluation is likely over the next 3-4 years. This increases pressure to "decouple" -- specifically for China to discontinue buying US Treasury bonds, and to invest that capital into its own economy, which it has been doing. As China invests more in its own domestic economy, it will boost the economies of geographically related countries that can export necessary commodities to China. That's where Australia comes in.

2. Australia's central bank, the Reserve Bank of Australia, currently has an interest rate target of 3.25%. In a world where zero percent interest rates are becoming the norm, this is quite appealing, and may attract capital that is seeking the security and liquidity of a currency but with an interest rate yield as well. Put another way, the Australian dollar could be the new carry trade.

3. The Australian economy has, at least for now, remained relatively unscathed by the global economic crisis. In Australia, wages are up, business investments are up, retail sales are increasing, the housing sector is expanding, and the country si running a trade surplus.

In light of the aforementioned, the Australian Dollar seems like a viable long-term alternative to the British pound and the US dollar.

Trading the Australian Dollar

Personally I've been riding the recent short-term rally in AUDJPY (Australian dollar against the Japanese yen), though price action is suggesting this rally may be out of steam in the short-term. Patient traders, though, may wish to keep an eye on AUDUSD and look to enter as momentum turns upwards. The chart below illustrates key price points that can serve as areas where prices may consolidate -- and thus where traders can look to enter or exit positions.

Disclosure: Long Australian dollar.

Discuss on InformedTrades.com

Australian Dollar Consolidating Now

Through the end of 2012, I am one of those expecting a shift in economic power from Western economies (namely the US) to Eastern economies (China, Japan, etc). In particular, Australia, as a producer and exporter of precious metals -- which stand to rise when fiat currencies are troubled -- and commodities as well, may find its currency in greater demand.

So is it time to buy the Australian dollar? Let's take a look at the price chart to get an idea if now is the time.

After being in a strong bear market since August 2008, the Australian dollar is now rallying. It is currently forming an ascending triangle/rising wedge pattern, as the chart above illustrates. The hourly and weekly chart also show consolidation, suggesting the market may be ready for a breakout.

For US stock market traders, FXA is an ETF that tracks the Australian dollar.

Disclosure: Long Australian Dollar.