Still positively correlated with the stock indices, particularly the S&P/ASX 200, the AUD/JPY currency pair strongly rebounded between February and June this year. It posted a recent high on June 11 at 80.43 (point C on the chart). From the low of 55.51 posted in early February (point E), it’s a rise of 45% in 4 months and a half.

The trends are therefore really easy to identify on this chart. First, there was a sharp bearish trend that drove the price from 104.50 to 55 in the second half of 2008 (between points A and B), when the financial crisis was spreading globally. As you know, this plunge particularly impacted the commodities and stock markets, but also the FX carry trades. The AUD/JPY was one of the most popular carry trades: risk aversion and deleveraging hit strongly the value of the “Aussie” against the Yen.

Click to enlarge

The bullish trend that followed (between points E and C) retraced half of the previous plunge. Indeed, the price action failed on the 50% Fibonacci retracement level, which corresponds to the level of 80. This level acts as a resistance line and is likely to hold firmly. The price peaked on this level three weeks ago, and immediately corrected. This was due to profit-taking and short-selling around this key Fibonacci ratio. As a result, the price fell back to the previous Fibonacci level (the 38.2% ratio, point D) where it found some support. Then the AUD/JPY has been bouncing back for one week now. A new attempt to break above the resistance line is probable.

Look at the Bollinger bands: the price action found bounced on the lower band. A move that originates at one band tends to go all the way to the other band. This observation is useful when projecting price targets. The upper band currently corresponds to the resistance line at 80. This is the objective for the current price action (the AUD/JPY is currently trading around 77.70).

But as mentioned above, the resistance is likely to hold. The indicators show that a bearish divergence has appeared. The MACD did not confirm the new high of the price action in June, and has already started curving downward. In this scenario, the AUD/JPY should quickly jump to 80 and then correcting strongly in the following weeks.

Asian equity markets ended mixed Monday, with South Korean stocks shaking off initial concerns in the wake of a nuclear test by North Korea to end only slightly lower after a choppy session.

Tokyo stocks rebounded after dropping in the previous two sessions with steelmakers pacing gains, while Australian shares declined as authorities lifted a ban on short-selling.

Trading volumes were weak in several regional markets on caution before a holiday in the U.S. and the U.K.

In Seoul, the benchmark Kospi made a tentative start but sank as much as 6.3% by midmorning after North Korea conducted an underground nuclear test early Monday. But the market recovered sharply to end just 0.2% lower at 1400.90.

“Historically, we have experienced that the market volatility because of political issues is only short-term,” said Dongwook Han, strategist at Hyundai Securities.

Referring to the recent market gains, Han added that improving South Korean and global economic fundamentals and the likelihood that liquidity in markets around the world will be sustained in the second half of the year could push market further up in coming weeks. He expects the Kospi to hit 1700 points later this year.

A number of key stocks dropped sharply in Seoul during the session, but recovered the lost ground in afternoon trading. KB Financial Group ended 0.9% lower and Hyundai Motor gained 2.3%, while Hyundai Securities gave up 4.4%.

Japan’s Nikkei 225 Average ended up 1.3% at 9347 and Hong Kong’s Hang Seng Index closed up 0.4% at 17121.82.

Australia’s S&P/ASX 200 fell 0.6%, Taiwan’s Taiex ended little changed, China’s Shanghai Composite rose 0.5% and New Zealand’s NZX 50 dropped 0.7%. India’s Sensex ended 0.2% higher while Singapore’s Straits Times advanced 1%.

In Mumbai, the highlights of the session included a near 21% surge in the shares of Ranbaxy Laboratories following a management change over the weekend. Bharti Airtel dropped more than 5% on news it planned to buy a 49% stake in South Africa’s MTN Group.

The currency markets saw volatile trading in the wake of North Korea’s nuclear test, but also recovered. The U.S. dollar jumped as high as 1,269 won, but pared gains and was recently at 1,248 won, compared with 1,247.4 won Friday.

Referring to the won’s sharp movements, Standard Chartered strategist Thomas Harr said investors were used to the posturing of North Korea. “This may be an opportunity for offshore investors to sell the dollar/won later.

In other currency trading, the euro fell against the U.S. dollar as risk aversion picked up, at $1.3984 from $1.4015 in New York on Friday. Against the yen, the euro was buying 133.03 yen, after rising to 133.43 yen. The dollar was changing hands at 95.08 yen, from 94.85 yen on Friday.

Among financial stocks in Australia, Australia & New Zealand Banking Group dropped 1.4%, Commonwealth Bank fell 2% and Suncorp-Metway gave up 2.9%.

The Australian Securities and Investments Commission said it had lifted its ban on covered short-selling of financial stocks, though it added it could quickly re-impose the ban if needed. The ban was put in place on Sept. 21, 2008, in the wake of the collapse of U.S. investment bank Lehman Brothers.

“There has been some impact when you consider that the financial sector is the weakest across our market,” said Shaw Stockbroking’s head of trading Jamie Spiteri. “But] there wasn’t a huge increase in traded volume today. I think there has been some impact, but the decision to lift the ban isn’t surprising.”

Commodity plays gained in Japan and Australia on higher metals prices, with Nippon Steel up 2.7%, JFE Holdings rising 3.7% and BHP Billiton up 1.2%. Shionogi jumped 5.7% in Tokyo on news it would market a new influenza drug in Japan next year.

In Hong Kong, China Insurance International Holdings gained 8.5% on a plan to buy a 47.8% stake in Ming An Insurance.

Shanghai-listed shares were volatile amid concerns about a glut in share supply after Beijing indicated it would remove an unofficial eight-month ban on initial public offerings as early as next month.

“Worried investors think new share offerings will divert cash from the secondary market,” said Chen Jinren at Huatai Securities.

Singapore Petroleum surged 20.2% in afternoon trading on news of PetroChina’s offer to buy Keppel Corp.’s 45.5% stake in the company and make a general offer for the rest of the oil refiner, if Keppel’s stake sale proved successful. Keppel was up 6% on the prospect of a windfall from the sale of its stake, and PetroChina finished down 0.8% in Hong Kong and ended up 1.9% in Shanghai.

Spot gold was down $4.10 from New York Friday, at $952.40 a troy ounce. Front-month Nymex crude oil futures were 64 cents lower on Globex at $61.03 a barrel, after rising 8.2% last week, including a 1% gain on Friday.

“You’ve definitely got to be asking some questions about how much further prices can rise before we’re going to see some real evidence of demand recovery,” said Toby Hassall, a trader at Commodity Warrants Australia, who tipped crude in a $60 to $65 range for now.

The Bank of Japan (BOJ) signalled on Friday that the worst of the global crisis may be over for the world’s second-largest economy, which shrank at a record pace in the first three months of the year.

After a two-day policy meeting, the central bank said it had upgraded its view on the ailing economy, saying conditions were still deteriorating but noting that steep declines in exports and output appeared to be levelling out.

Such an upgrade by the BOJ could indicate that it may pause in expanding the range of unconventional policy steps it is considering to revive the economy, such as buying of corporate debt. But it could face pressure to do so again if the economy does not recover as it hopes.

The BOJ board also voted unanimously to keep its overnight call rate unchanged at 0.10 per cent.

BOJ Governor Masaaki Shirakawa will hold an embargoed news conference later in the day, with his comments due out some time after 0715 GMT.

Since last October, the BOJ has been buying risky assets such as company bonds to ease tension in markets. It has also decided to buy shares from banks to reduce banks’ exposure to stock market fluctuations.

The BOJ said on Friday it would accept US, UK, German and French sovereign debt as collateral it takes for its market operations, which would give banks more flexibility in fund raising.

Still, analysts say there is little immediate need for central banks to expand the collateral they accept because strains in global money markets have eased considerably.

Highlighting the woes Japan is facing, data showed this week that the economy shrank 4.0 per cent in January-March, as a plunge in demand for Japanese-made cars and flat-screen TVs prompted firms to stop capital spending.

In the past few months, some signs have emerged that the global economy is stabilising, but it is far from clear when it will begin growing again or how strong any recovery will be.

The BOJ said last month in its twice-yearly economic outlook report that the Japanese economy would slowly recover later in the year in line with an expected pickup in the global economy.

While BOJ officials have been relieved that the freefall in output is subsiding, they remained cautious over whether the recovery will be sustainable.

Masaaki Shirakawa, the bank’s governor, said on Wednesday that the uptick was mainly due to companies replenishing depleted inventors rather than a sustained recovery in consumer spending, which is key to turning the global economy around.

Recent strength in the yen has added to concerns that exports will remain under pressure, but Japanese Finance Minister Kaoru Yosano said on Friday that Japan is not considering intervening in currency markets right now.

Japanese policy makers have remained calm so far even as the dollar fell to a five-month low on concerns that the United States is at risk of losing its top credit rating after Standard & Poor’s said it could downgrade Britain’s triple-A credit rating.

Japan has not intervened in the currency market since March 2004, after a 15-month-long, 35 trillion yen (US$371 billion) selling spree aimed at preventing the currency’s strength from snuffing out an economic recovery.

Back When “Boodlers” (Not Central Banks)
Counterfeited Currency…

As Bruce Sterling puts it, “If some joker told you that a one-dollar bill from the Railroad Bank of Lowell, Massachusetts had a woman leaning on a shield, with a locomotive, a cornucopia…then you pretty much had to take his word for it.” And in that particular case the joker was actually telling you the truth.

So the variety of these bills – and the virtually impossibility of spotting a fake – made boodling a breeze.

I hope no one takes offense at this; but Americans were more gullible people back then. They looked upon boodlers with awe, seeing them as ingenious masters of complicated technology. Sterling likens boodlers to the “hackers” of our day.

So these dollars circulated with relative ease…at least until the introduction of the Secret Service. One frightened estimate said that roughly a third of the dollars in circulation were fakes, neither issued by a bank nor backed by any real gold. The first cChief of the Secret Service – William P. Wood – even estimated that a full half of America’s dollars were fakes!

But uniform rules for currency really only made the situation worse. The first greenbacks – so called because only the back of the bill was printed in green ink – were easy for boodlers to copy, and the situation didn’t really change until the Secret Service went into action.

But why are we talking about 19th Century counterfeiting? It’s because we’re now facing one of the biggest boodling epidemics in world history.

The Promise

One of the key attributes leading to the success of fiat currency (paper money) has been the fact that it’s accepted by the government for payment of taxes. So even if no one else will accept your paper bills, at least your own government promises to accept them as payment.

It may seem like a benign attribute. But in reality, this promise is pretty much the basis for the value of paper money. Since everyone has to pay taxes, everyone has at least a degree of interest in accepting their country’s paper money. And if enough parties accept the money, then the currency can function as a store of value.

So the government’s promise to accept the bills for tax payments ultimately amounts to a promise that those dollars are worth at least something.

But doesn’t that mean that a problem would arise if you started counterfeiting the currency or circulating dollars that aren’t backed by anything? I mean, conjuring this money out of thin air must have some kind of devastating effect, right? The promise is effectively broken, right?

Well, yes and no.

It turns out – as we can see in the story above – that this promise is not very easily broken.

The promise can be bent and warped…even torn at a little bit here and there. But the dollars will still be worth something. Instead of the promise simply being whole or broken, there are varying degrees at which the promise can exist.

This is best evidenced by today’s free-floating exchange rates and the fact that a dollar today might not have the same value as a dollar did yesterday. It turns out that this kind of promise from an established and powerful country is, in fact, very elastic.

Indeed, as we can see from the example above, this promise can sustain major blows from counterfeiters or anyone else creating dollars out of nowhere. A full third of the economy’s paper money was counterfeit in the 1860’s, but the system still seemed to work.

So what does this mean for today’s boodlers at the Fed and the Treasury?

It means that their calm is – at least in part – justified.

These systems don’t break down overnight, and we’re not going to wake up tomorrow to a full-on bout of hyperinflation. Rather, the exchange rate of our dollars will continue to reflect the value of that promise in the minds of all those holding dollars (at least when compared to the promises made by other countries.)

So for all the naysayers and chicken little’s that say we’re heading full-speed into a hyperinflationary crash…perhaps they should be looking into the pages of history. Because this isn’t the first time that the American economy has been replete with currency conjured from thin air.

First, the long-term bearish trend: it is solidly built by a succession of lower highs and
lower lows as shown on the weekly chart. The rebound started in March is well illustrated by
the indicators. They suggest a continuation of this rebound.

Both the MACD and the Momentum indicator are well oriented. The MACD is still at a low level
and moves above its moving average. The Momentum indicator has spiked during those past few
weeks and has just crossed the 100 line.

The Bollinger bands show that the recent bullish price action has made a pause, capped by
the moving average of the Bollinger bands. But two main characteristics here may argue for a
further bounce. Bottoms made outside the bands followed by bottoms made inside the bands
call for reversals in the trend: this is what happened on point A. Then, a move that
originates at one band tends to go all the way to the other band. This observation is useful
when projecting price targets.

That’s why a continuation of the rebound is possible. In this scenario a move towards
900 points would be the main objective: it corresponds to both the upper Bollinger band and
to the previous lower low (point B).

That’s a risky trade but the reward could be worth it: the potential upside is 33%.

The trade idea is therefore: BUY XPJ on the current levels, with a close stop-loss at 630
points (below the recent lows). Place your take-profit a bit below 900 points.

There was a lot of talk in the media last year about the Euro replacing the US Dollar as the Number One currency of choice in the world. The Euro climbed in value to around 1.6000 US Dollars, based on a lot of negative news for the United States economy.

Chart 1 below shows the Euro futures contract (EC-Spot in ProfitSource).

Chart 1

click to enlarge

Because each currency is valued against another currency, this chart represents the value of the Euro against the US Dollar. If the US Dollar is weakening, we would expect the Euro to rise in value, unless the Euro is also weakening.

You can see that from late 2005 to July 2007, the Euro had been trending strongly upwards. In the months following February 2008, the uptrend accelerated with a large amount of negative news coming out regarding the US economy and the US Dollar.

At the same time, nothing was said about the health of European economies, so the obvious move by traders was to buy Euros. Because of this scenario, the Euro was “overbought” in my opinion, rising higher and faster than it really should have.

When news started to come out mid way through the year showing that Europe had problems of its own, the market corrected itself, falling sharply. Even though we had a major crash, with the Euro dropping close to 4000 points over the past months, I would argue that it has simply returned to where it should have been in the first place.

I think in the year ahead we will see the Euro overtake the US Dollar as the currency investors turn to as a “safe haven”, if such a thing still exists in times like these.

The current market action is unfolding in a similar manner to the last major bear market low in November, 2005 on the Euro. In Chart 2 below, I have used the Split Screen mode in ProfitSource to analyse these two periods of the market side by side.

Chart 2

click to enlarge

The chart on the left shows the movement out of the November 17, 2005 low while the chart on the right shows the current market action, as we move away from the late October lows.

If these levels can hold moving into 2009, then I would expect the Euro to work its way back up to around 1.50 next year.

These periods of the market after sharp falls can be difficult to trade, as they are volatile and choppy. In the past month, we’ve seen the Euro trade in an 800 point channel, so care must be taken when looking to get set in this market.

I am confident that once the market has consolidated, we will see a strong move up lasting several years, as the US Dollar weakens and the Euro continues to gain in strength.

I would be surprised if the current lows in the market did not hold.

The hardcore dollar bears said we were crazy for even mentioning the idea that the dollar could rebound during all this economic turmoil.

How could the dollar possibly rally during the worst financial crisis in a generation? (That was a year ago before we knew how far and wide the credit crunch would reach.)

But the fact is, that’s exactly what’s happening now.

I’ll admit that the dollar didn’t rally right away. It took months. In fact, the dollar index didn’t bottom until the day after the Fed bailed out Bear Stearns.

But then, the dollar slowly started to creep higher. And since mid-year, the dollar has been on a tear against the world’s major currencies. In fact, the dollar has jumped 16% just since September.

Crisis Profiteering: Your Dollar Profits from Credit Crunch

And it looks like this dollar rally will continue.

In fact, the dollar is one of the few currencies we are long-term bullish on for 2009. We see the dollar rallying through at least the first half of 2009. As I said on Tuesday, the dollar will continue to fly high on a combination of…

• Its Safe Haven Status: Scared traders are running back to the world’s reserve currency as the credit crunch continues to sweep the markets.
• The Mad Dash for Cash: Stock investors are still dumping whatever is left of their portfolios and running back into cash (in this case, the U.S. dollar).
• Whoever Can Fix the Crisis Gets the $: For now at least, it seems Forex traders believe the U.S. is better equipped to deal with the credit crunch, so they’re pouring money into dollars.
• Crisis Feeds Low-Yielding Currencies: During recessions, Forex traders run for safety, so they trade in their high-yielding currencies for the safety of lower-yielding currencies. So the dollar, now yielding 1%, actually has an advantage right now.

• Yes, You Can Invest in a Dollar Rally With Foreign Currencies

  Now it may seem strange to play a dollar rally by investing in foreign currencies, but actually there are a couple key ways to profit off this massive dollar rally next year in the currency market.

  You could call your stockbroker, and simply ask to short any number of currency ETFs, or even go long the few dollar ETFs they have available.

  That’s an excellent way to play the dollar rally - particularly if you’re a longer-term investor. However, ETFs only offer conservative returns (15% to 20% - definitely not bad, assuming stocks continue to plummet).

  But in my opinion, there is a bit more interesting way to play this dollar rally either in the options or exotics market. For one reason: Leverage. Leverage allows you to invest a smaller amount, but still shoot for the big gains - often double or triple-digit gains in just a matter of weeks.

If history is our teacher, it tells us that the dollar does respond to any crisis for a few months or so typically after the economy hits another rough patch. However, afterwards, it reverts back to the trend at hand.

If it went into the crisis in a downtrend, then it goes back into it again. And if it went into the crisis in an uptrend, then it tends to revert back to that uptrend too.

If history is any indication, then it’s very possible the dollar will simply continue the downtrend it’s been in for the past six years: crisis or no crisis.

But due to additional factors - namely the dollar being at a 30-year low point at the beginning of this predicament - I don’t think it’s going to be a very clear downtrend. At least not in the short-term.

I see the dollar ‘ranging’ (Forex speak for going nowhere at all) over the next few years, much like it did after the S&L crisis, as you can see below.

Bank Failures Mean the Bumpy Ride Will Continue

This is what I believe may happen this time as well. However, on a year-over-year basis, it won’t feel like a wide range. It will feel like very strong, sharp uptrends. It’s only when you look back on this era over 10-15 years that you may see the dollar ranged for several years after - what shall we call it? Perhaps - “The Bailout Crisis of 2008.”

In the midst of all of this market turmoil, our old friend during risky markets - the Japanese yen - is still rising. You can pair this gem with almost any currency in the world right now - especially the British pound.

The Japanese yen has been beating out every single one of the top 16 or so currencies. So this is the biggest place that money is running to right now.

Why is this happening? It’s not that Japan’s economy is so strong. In fact, Japan may be entering into a recession as we speak. So what’s going on? In the past, as stock markets grew strong and volatility stayed out of the markets, investors around the world bought high-yielding currencies with borrowed money in the lowest yielding currency in the world, the Japanese yen (0.5%).

Many of these currencies reaped 6-8% a year. As an investor, all you had to do was pay between zero and one half of 1% if you borrowed yen. When you add a bit of leverage to these positions, you reap even greater returns just by borrowing low and reinvesting those funds. This strategy worked for years during calm, cool, and collected financial markets.

However, as we know…since about a year ago, the markets have taken a turn for the worse. We’re now in a high-risk, volatile market. That’s obviously not conducive to this type of currency investing called “carry trading.”

So as these positions are closed out (or as they say in the industry - unwound), they sell the higher yielding currency like Aussie or New Zealand dollars or like the euro or pound and have to pay back that loan of yen. When they do this, they are “buying back” yen which causes the yen to pop up.

It’s almost like a short-seller in stocks covering his short-sell by buying back the shares to close the position out.
Long story, short: As long as the turmoil lasts, the yen will prosper. Traders will continue to unwind positions as many are either margin-called or flat-out scared out of their positions.

This is pretty typical of professional traders. All the pros leave the FX market alone on holidays. In fact, my opinion is that the Forex market should post a sign that says “Enter at your own risk” during major U.S. holidays.

I say this because the Forex market is like a renegade switch on most holidays. The market is either “turned on” and your trades are moving like crazy (which means it’s hard to predict what will happen next). Or the market is completely “turned off,” and it’s about as interesting as watching paint dry.

More often than not, you’ll see BOTH scenarios happen on a single holiday. First the market will be switched on, and then it will suddenly switch off - or vice versa. Unfortunately, there’s never any telling which comes first…the “calm” or the “storm.”

So on any given holiday, I generally wait until the afternoon to check on the currency markets. Then I just wait for the “show” to start. Frankly, for a seasoned trader like myself, it’s fun to watch the markets move that fast.

But it’s definitely NOT time to start trading. Please keep that in mind for every holiday going forward.

On August the 8th, Russia declared war on Georgia. By the 9th, it was an all-out bloodbath. Reports show that over 2,000 people have died during that short time and over 100,000 people fled the conflict.

As you can see, war is never pretty.

This week, Russian President Dmitry Medvedev and Georgian President Mikheil Saakashvili are already planning to sign a peace plan. But still the damage has already been done – particularly to the Russian ruble.

Honestly, what happened to the ruble this week is pretty common during wartimes. So this begs the question: How does a war affect a currency?

Well, as I often say: Money hates instability. There is nothing more unstable and unpredictable than a war where anything can happen. You also never know how long one will last, who will win, and what will be lost along the way.

As an investor, you’re left to suspect the worst. That’s why most investors grab their money and run to safer, more stable countries until the coast is clear.

Russia Declares War and
the Ruble Sinks 4% in 5 Days

To this day, Russia still has a bad reputation for decades of shady dealings. As such, investors never seem to fully trust the Russian markets. If a conflict breaks out, investors rush in and grab their cash even faster than they would another country.

And that’s exactly what happened when Russia declared war on Georgia.

Check out the chart of the U.S. dollar vs. the Russian ruble below. You’ll notice the ruble tanked over 4% in just 5 days after war broke out.

With Leverage, You Can Turn that 4% move into 400% Profits

Now that may not seem like much to you. But you have to remember that small movements in currencies add up to a lot in trading accounts.

Spot Forex accounts are commonly leveraged 100 to 1 or even 200 to 1. So a 4% move can be magnified to equal a 400% to 800% move in just 5 days.

If you bet against the ruble just as the Russians declared war, then you would be sitting on some healthy profits right now. However, if you bought the ruble formerly because it has done well in this “energy/commodity” boom, then you probably watched your account sink into the negative territory over the last few days.

Most trading accounts can’t take 400% to 800% losses on their positions over a five-day period and survive.

So ruble traders really had a wild ride since this began.

Is the War Over Yet?

Let’s suppose for a moment that the war truly is over and things somewhat revert back to normal (a Russian normal anyway). If that happens, then Forex traders will probably see it as a buying opportunity and grab the ruble once again at bargain prices.

However, if the conflict isn’t truly over, or if another one erupts, then you will see the rollercoaster ride begin again.

It takes a strong stomach to invest in the ruble right now. Much of the time it has been a very profitable “one way bet” against the buck since 2003. However, in times like these, you never know what the Russians are going to do.

On the other side of the coin, if you’re pulling money out of Russia, you’d better hide behind another BIG country. So many traders ran to the U.S. dollar since it’s the “Big Brother” that might be able to protect them and their money.

However, other traders chose to run to the “risk adverse” currencies of the Japanese yen and the Swiss franc. Both of these currencies have torn a chunk out of most currencies over these same five days with the exception of the U.S. dollar.

Right now, the buck can’t seem to do anything wrong and is rallying against any currency I have on my screen.

So war really “stirs the pot” because it not only causes money to run away from the country at war but also it has to find a hiding place. That hiding place won’t be the same for every investor. It may be two or three of the other biggest currencies in the market.

Bottom line: Money tends to run for cover at the first sign of conflict and tiptoes back in later after the conflict ends. Something to keep in mind the next time a war breaks out…

The Commodity and Currency Circle

If the global economy is slowing, and China is forced to work through excess inventory, demand for commodities will be impacted. I’m guessing crude oil prices, in particular, will suffer from the realities I just described.

And remember, commodity prices and currencies influence each other in a self-feeding circle.

For example, falling crude prices could be the one thing that allows U.K. and European central banks to begin lowering their interest rates.

If and when that happens, the dollar will become more attractive relative to those currencies.

It wouldn’t take a bold move on the part of the U.S. Federal Reserve, either (nor do I expect one).

A narrowing interest rate disadvantage between the dollar and euro - or the dollar and the pound - would be hugely supportive for the greenback.

In fact, this may very well be why the dollar HAS ALREADY been holding up given such incredibly dismal news day after day from the U.S. economy.

Take a look at this chart …

Over the last year or so almost everyone’s been pointing to the inverse relationship between the U.S. dollar and crude oil.

At the very left of the red rectangle on my chart, you can see where the tight inverse correlation began to break down. That’s when the dollar bounced higher from its all-time low. Crude soared well beyond its record high at the same time.

Crude rallying and the dollar drifting slowly higher simultaneously? That was certainly no inverse correlation.

But from the furthest right point of that red box is where the tight inverse correlation has resumed. Only this time, the direction is in favor of the dollar. And it comes exactly after a new all-time high for crude prices.

Translation: The buck could be back.

The dollar has been able to continue its rally this week, even amidst a blitzkrieg of central bank announcements. While it has a long way to go - and recovery may not be swift - I think it’s time to keep the dollar rally scenarios in clear sight. Especially now that other economies are catching the bug.