Dollar about to rally?

The EUR/USD and GBP/USD are at critical points this morning.  The looming US government shut-down over the annual debt ceiling horse trading, combined with the continued QE operations from the Fed have combined to convince many that the dollar is to be shorted.  In fact the COT data back this up.

My long-term view is for the dollar to head higher -much higher. This is because when interest rates turn up with force (as they will), debtors will be scrambling to pay off loans, and most of the world’s debt is denominated in dollars.  Despite the recent history of the Credit Crunch, debt levels are ballooning again as investors grab any old bond issue they can – even junk bonds are in great demand.

But we have seen the first whiff of what a rising US mortgage rate (from 3.7% to 4.5% recently) can do – already housing activity has been hit.  This is only the first volley in the upcoming Debt Wars.

Last week, the EUR/USD was bought heavily by the hedgies.  Also, the commercials (the smartest boys in the pack), reduced their net long exposure – all this just before the market moved up on the Fed taper news.

Here is the GBP/USD data:

Again, the hedgies massively increased their long exposure, but the commercials went the other way, increasing their net short positions.

This is telling me that expectations are high for a dollar decline.  But with a potential tramline break and the rally to yesterday’s high which is a Fib 87% retrace of the last wave down, I believe a downward break is imminent.

I shall be looking for a short trade.