The United States Dollar Index monthly chart is the most interesting chart I’ve looked at today. The dollar has successfully beaten up most major currencies in December, and appears to be ending 2009 with a solid bull pattern along demand established in 2008. The market appears to be content betting on an accelerated recovery in the United States, but the question remains, will this trend continue or is this a dead cat bounce? The Dollar Index is trading at resistance near $78.00, and could easily turn lower from here.  So far, it appears the market has pushed above this resistance on the weekly chart. With the markets in holiday mode, and volumes thin, it is hard to tell at this point whether the break above resistance at $78 has teeth or if dollar is simply benefiting from thin volume.

Personally, it is hard for me to picture a long term trend of dollar strength. The United States Congress seems set on “saving billions, by insuring millions” through health care reform, while aggressively spending every dollar they can collect or print. That being said, price is never wrong, so if the market wants to go higher in the short term I’m happy to ride along. This week, the market will get data on United States third quarter GDP, durable goods, and existing and new home sales.  Considering the current sentiment seems to be banking on an accelerated U.S. recovery, any shockers in this data could take the wind out of dollar’s sails. So how could we play this?

CAD is the only major currency that hasn’t been totally slaughtered by the dollar over the last few weeks. It has remained stuck in a consolidation range just above the key price pivot of $1.04. This morning the market saw retail sales data from Canada that wasn’t on par with the expectations of a hot recovery in progress. The retail sales numbers came in on target, but core retail sales slipped 0.2 percent. Automotive sales at new car dealers rose 3.6 percent however non-automotive retail sales slipped 0.2% in October. Declines were also seen in food and beverage (-1.2%), pharmacies and personal care (-0.9%), and beer, wine and liquor store sales (-2.2%).  I suppose one could argue if the economy is improving, the need for Crown Royal or Grey Goose Vodka would indeed drop. Canada will release GDP data on Wednesday, but that is it. With the retail data at expectations or below, that may open an opportunity for the dollar to gain ground fundamentally on the loonie this week. It is worth noting, all of the gains made by the loonie overnight were erased by dollar bulls during New York trading today.

Keep an eye on the USD/CAD, this pair is bound to breakout at some point.

Best of luck,

Ryan