We find ourselves in an unusual predicament. Risk currencies were already looking quite overbought before Bernanke dropped the bombshell and pushed everything even further. We’re now stretched uncomfortably to the upside with market sentiment clearly showing intentions of further upside, but with levels where they are, we could definitely do with some dollar relief. USD% index RSI was at an eye watering 13 earlier and retail order-books are very in the red, but with the Fed still maintaining the full asset purchase and uber-dove Yellen likely to take the helm, the printing press seems sure to see more action until fundamentals in the US are a lot better, which given the downturn in performance lately could be some time yet.
This in turn has a knock-on effect globally with Draghi ad Carney’s tasks of maintaining growth now significantly more difficult. Expect a step-up from the BOE and the ECB to try to counter the effects of the weakening dollar. Perhaps more of a problem though is Japan, who’s massive stimulus program seems to have stopped holding the Yen lower, so this dramatic weakness from the US dollar will cause even more issues for Japan’s huge experiment. A backfire there and we’ll be praying for a return to the good old days of peripheral European insolvency.
Bullish patterns have now been removed and the USD% index is comfortably back into the major bearish channel that was recently broken out of. Interestingly, the bottom of the day was the lower bound of a very old consolidation channel shown in blue which has provided support and resistance form most of the spring and summer. With levels so oversold, we should see a retracement higher, with resistance at EURUSD 1.3450 a strong level for dollar shorts (EURUSD longs). I am bearish USD
USD% Index Resistance (EURUSD support): EURUSD 1.3450, 1.3420, 1.3364 USD% Index Support (EURUSD support): EURUSD 1.3617, 1.3691
An updated chart now shows bullish scenarios and places the EUR% index with further room above before major channel resistance is met at EURUSD 1.3661. The potential double top from the index was comfortably broken to the upside which may act as support for latecomers to the EURUSD long party if this level if retested. I am Bullish EUR%
EUR% Index Resistance: EURUSD 1.3582, 1.3661, 1.3825 EUR% Index Support: EURUSD 1.3500, 1.3461, 1.3400
EURUSD Trade Positioning
My Short from 1.3347 hit stops for a loss and I have a limit order to buy EURUSD from 1.3461, stops below this week’s low.
The long standing bearish JPY trend seems to be in jeopardy, with a constant failure to push significantly lower within the major channel. The low is now a very long time ago (mid May) and despite everything that Abe has thrown at the Yen, it seemingly wants to correct higher with a test of critical resistance sooner rather than later. Price action has been choppy and the Nikkei is still rallying which may delay the inevitable, but with the Fed to fight against, my money is on the dollar winning the race to the bottom. I am bullish JPY%
JPY% Index Resistance (USDJPY Support): USDJPY 97.64, 97.35, 96.4 JPY% Index Support (USDJPY Resistance): USDJPY 98.60, 100.00, 103.00
USDJPY Trade Positioning
A push through resistance today saw the GBP% innex accelerate further higher, although this index is becoming painfully overbought now and has just met major bullish resistance which may prevent any further upside until some consolidation occurs. I am bullish GBP
GBP% Index Resistance: GBPUSD 1.6166, 1.6267 GBP% Index Support: GBPUSD 1.6014, 1.5917
Although hardly music to the RBA’s ears, the Australian dollar is now looking very bullish with plenty of upside possible. The RBA will no doubt ramp up their doveish rhetoric to try to dampen the rally, but faced with the full force of the Fed for the moment, I doubt their ability to squash any rallies at the moment. Gold will get a healthy boost from the weakening dollar also which in turn may add to the Aussie’s strength. I am Bullish AUD
AUD% Index Resistance: AUDUSD 0.9525, 0.9570, 0.9689 AUD% Index Support: AUDUSD 0.9525, 0.9480
The CHF% index also comfortably broke resistance today with a push up to double top before running out of steam. It will be interesting to see how the market handles this level given the Swiss franc’s sensitivity to the dollar at the moment. I suspect a push through this level to test the 138.2% fib expansion level although perhaps after some consolidation. I am bullish CHF
CHF% Index Resistance (USDCHF support): USDCHF 0.9116, 0.9094, 0.9050 CHF% Index Support (USDCHF resistance): USDCHF 0.9173, 0.9184, 0.9200
Although looking like selling from the suggested area today, Bernanke put paid to any CAD selling with the index rallying up to resistance. It now seems likely to see a push to the top of the channel at the equivalent of USDCAD 1.0119. I am bullish CAD
USDCAD Trade Positioning
My USDCAD longs were stopped out and I now remain sidelined until we meet the top of the channel.
Written By: Mark Lewis