Yes, I believe so. Dollar bulls should worry.

This is a very serious issue. I’ve been attending a lot of seminars from bank analysts to economists and they’ve been cheering about the bullish dollar. I can’t blame them.

Looking at the 3 year weekly chart of the dollar peso, the currency has travelled from a low of 40 to a peak of 50 – a marvelous 20% rally in a span of 10 months. Even I who had been bearish on the dollar joined the bandwagon by buying the dollar on its way up when it formed the bullish cup and handle.

Everyone is looking to buy the dip believing that the trend is still going to go to higher ground with even some economists predicting 51 by Dec 08. But I am fearful of their forecasts.

3 year weekly chart of USD/PHP

Technicals:

The MACD is crossing down and the stochastics are overbought. While the moving averages are still catching up, notice that 50 is the psychological resistance that was formed in Dec 2007. It has retested this level but has not broken out of 50. It then succumbed to profit taking and selling pressure. Note that this correction will first find its support at 47.00. At current levels of 49, what does this scenario paint for us?

If you invest your pesos into stocks right now, you will probably be able to gain from your stock in the long term and gain from the currency appreciation since selling your dollars at 49 and buying it back say 46-47 area will result into a profit two ways (capital gains + currency gains).

If you believe that the market will simply dip and regain some strength to challenge the 50 mark, that means you are battling the overbought scenario and looking to sell at around 52, which means your upside is limited. While the moving averages are still in your favor, we will need to check what the market is like by then. Your psychology would have also been awful by then as an appreciation from 49 to 47 mark would have meant a substantial rally in Philippine equities (as risk aversion fades away) while you have converted your pesos to dollars missing the bottom’s bear market rally.

Recommendation: Sell your dollar at current levels of 49-50 levels with a target of 46-47. Meanwhile, your pesos can be left in time deposits or re-invested in current equity markets (assuming you know your technicals) to ride the huge bear market rally coming. Trade short term ranges or invest for the long term in Philippine equity markets.

Fundamentals:

Peter Cooper wrote in an article published last November 26,2008 outlining his reasons why h thinks the USD is going to devalue in the coming year. Yes, we know that the USD has been rallying sharply in recent months but that has mainly been because of the deleveraging of the commodities and the sell off that happened from global capital markets. Fed funds have been cut from 5% to 1% and are forecasted to fall another 50 bps coming Dec 16,2008.

The T-bonds’ interest rates have headed to record lows. Banks are paying higher rates on deposit accounts with countries guaranteeing those state deposits (e.g. Hongkong). Why would you hold bonds when you can just simply make deposit with a state guarantee and have your capital earn at less risk?

With all these scenarios, and with trillions of dollars being thrown in the economy. Bloomberg estimates $7.2 Tril as a figure for the total US bailout. Devaluation of the USD cannot be far away. Can America’s bailout not inflate the currency’s value? Obviously no.

Recommendation: Sell your dollars as USD is going to weaken in the coming months. Convert it to a better currency of choice such as precious metals.

Enjoy the strong dollar while you can. Marc Faber writes that the only currency of choice in such an environment is precious metals. So perhaps selling your dollar to pesos and buying some gold jewelry could help you protect your investments.