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FUNDAMENTAL ANALYSIS

Are the Dollar Bulls Retaking the Initiative?

Dollar, Bulls, Retaking, initiative, currencies , Fundamental Analysis, fx trader, forex29 Feb 2016

As systemic anxiety eased, the US dollar got better traction. The dollar-bloc currencies managed to hold their own as cross positions were unwound.  

Major bourses posted gains for the second consecutive week.  With the recent advance, several markets, including the S&P 500, FTSE and Sweden, China, Korea, and Taiwan are now positive on the month.  

The April light sweet oil futures had its highest weekly close this month.  More broadly, the CRB Index is nearly 7% off its February 11 low and posted its highest close of the month before the weekend.  In addition, the global capital markets appear to be less sensitive to the vagaries of the Chinese equities or the yuan as seemed to be the case a few weeks ago. 

Technical considerations favor further US dollar gains in the week ahead.  The RSI and MACDs for the Dollar Index are trending higher, and the five-day average crossed above the 20-day moving average.  The Dollar Index is testing an important resistance near 98.00.  A convincing break would immediately target the 98.75-99.00 area.  

Support is seen a little ahead of 97.00.   Encouraged by favorable economic data (upward revision to Q4 GDP, a larger than expected rise in the January core PCE deflator to three-year highs, and an uptick in consumer confidence), before the weekend, the Dollar Index recorded an outside up day by trading on both sides of the previous day's range and closed above the high. 

Similarly, the euro finished poorly, posting an outside down day ahead of the weekend, and closing below the uptrend line drawn off the early December lows.  Recall that low was set near $1.0525 before Draghi disappointed and/or sell the rumor, buy the fact type of activity.  The weekly close below $1.0950 and the technical indicators suggest immediate potential for another cent lower. Although it had been penetrated before, the $1.0800 level still has technical significance.  On the upside, the $1.10 area likely becomes resistance again. 

The backing up in US yields and the lower volatility impulses from the equity market have helped the dollar carve out a potential double bottom near JPY111.00.  However, it will not be confirmed unless the dollar moves through the neckline a little below JPY115.00. 

The measuring objective is near JPY119.00, which corresponds to the 61.8% retracement of the dollar's slide since last November.   The 100-day moving average is near JPY119.50.  The RSI bottomed earlier this month while the MACDs are only crossing now. 

Sterling lost nearly 3.7% over the course of the week, and the selling does not appear to have exhausted itself.  It recorded an outside down day before the weekend to record new multi-year lows and negate the two-day consolidation that had spurred some talk that market had gone too far.  Even if it has gone too far, it surely does not mean that it can't go further.  And that seems to be the most likely near-term technical scenario. 

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