Looking across a number of USD charts, it would appear we’re at a
crossroads here for the USD at current levels, in which it is either
time for the greenback to make a show of force, or for it to crumble
anew and possibly test its all time (trade weighted) lows. Event risks
that could provide the trigger for a move one way or the other include
the US employment report tomorrow and then the beginning of earnings
season next week in the US. (On that note, read ZeroHedge’s coverage
of a recent piece by SocGen’s Albert Edwards, which contains a
fascinating read on the corporate earnings cycle backed up with a few
very interesting charts.)
Here is a brief look at a number of USD pairs/measures.
Carry Trade Index
The recent weakness in risk appetite saw a reasonable recovery in the USD, though not as large as the normal negative correlation between risk and the USD would suggest should have been the case. Part of the reason for the wan USD performance may be that the data picture from the US was so incredibly weak that the interest rate view outside the US failed to compress much relative to the US interest rate view, though the US interest rate comparisons have offered some support recently.
Here is a brief look at a number of USD pairs/measures.
Carry Trade Index
The recent weakness in risk appetite saw a reasonable recovery in the USD, though not as large as the normal negative correlation between risk and the USD would suggest should have been the case. Part of the reason for the wan USD performance may be that the data picture from the US was so incredibly weak that the interest rate view outside the US failed to compress much relative to the US interest rate view, though the US interest rate comparisons have offered some support recently.
The recent jump in risk appetite has pulled our carry trade index all
the way back into positive territory and our sample USD carry trade is
close to its all time high in response after briefly testing a
multi-month low on the nervousness in markets in May and June.
Chart: USD Index
The USD Index is clearly at a crossroads, as the rising trend-line has so far held, though the upward impulses have been equally inconclusive and the index is about as near the middle of the recent range as possible. A directional commitment would seem imminent. (Chart courtesy of Bloomberg)
The USD Index is clearly at a crossroads, as the rising trend-line has so far held, though the upward impulses have been equally inconclusive and the index is about as near the middle of the recent range as possible. A directional commitment would seem imminent. (Chart courtesy of Bloomberg)
Chart: Trade weighted USD
The trade-weighted USD is sagging a bit more, though it’s still a ways off its all time low from the beginning of May. (Chart courtesy of Bloomberg).
The trade-weighted USD is sagging a bit more, though it’s still a ways off its all time low from the beginning of May. (Chart courtesy of Bloomberg).
Chart: EURUSD
The majority of the USD index is EURUSD, so no surprise that the charts are similar. The ascending and descending lines of consolidation show how the pair is eventually headed for decision time and a break either way. Note how the pair is closing almost precisely at the midpoint of the formation today – the “pinnacle” of indecision.
The majority of the USD index is EURUSD, so no surprise that the charts are similar. The ascending and descending lines of consolidation show how the pair is eventually headed for decision time and a break either way. Note how the pair is closing almost precisely at the midpoint of the formation today – the “pinnacle” of indecision.
Chart: USDCHF
EURCHF is probably the more dominant pair traded as its ups and downs are one of the preferred ways in FX to express a positive or negative view on the Euro based on Europe’s sovereign debt situation, nonetheless, we have pointed out a few times recently that the pair is diverging quite strongly now from the interest rate spreads, which have moved quite sharply in the USD’s favor. The key area that must be taken out remains up toward 0.8550, as we discussed this morning.
EURCHF is probably the more dominant pair traded as its ups and downs are one of the preferred ways in FX to express a positive or negative view on the Euro based on Europe’s sovereign debt situation, nonetheless, we have pointed out a few times recently that the pair is diverging quite strongly now from the interest rate spreads, which have moved quite sharply in the USD’s favor. The key area that must be taken out remains up toward 0.8550, as we discussed this morning.
Chart: USDJPY
USDJPY has been stuck in a range for a long time now. Besides the spasm in March after the earthquake/tsunami, USDJPY has been in a 300-400 pip range since last September. USDJPY doesn’t correlate particularly well relative to other USD pairs, and may continue doing its own thing, as the focus tends to be more on the direction of interest rates. The JPY will look increasingly shaky if interest rates head higher from here. If not, the huge 80 level would swing into focus again for USDJPY. Note how the pair is poking at the important Ichimoku daily cloud on the close today – an important tactical resistance for the next couple of days of trading.
USDJPY has been stuck in a range for a long time now. Besides the spasm in March after the earthquake/tsunami, USDJPY has been in a 300-400 pip range since last September. USDJPY doesn’t correlate particularly well relative to other USD pairs, and may continue doing its own thing, as the focus tends to be more on the direction of interest rates. The JPY will look increasingly shaky if interest rates head higher from here. If not, the huge 80 level would swing into focus again for USDJPY. Note how the pair is poking at the important Ichimoku daily cloud on the close today – an important tactical resistance for the next couple of days of trading.
Chart: AUDUSD
AUDUSD Is poised today at the resistance area that has twice held it recently at 1.0780, which also happens to be the approximate are of the 0.618 Fibo retracement area for the sell-off wave from the 1.1014 top to the 1.0391 low. Aussie fundamentals have not been particularly compelling lately, but the market has been shrugging that off in favor of the focus on using the Aussie as a yuan proxy and playing its normal positive correlation with pro-risk trades like equities and commodities. There’s a train-wreck out there somewhere for the Aussie, but short term visibility is very poor.
AUDUSD Is poised today at the resistance area that has twice held it recently at 1.0780, which also happens to be the approximate are of the 0.618 Fibo retracement area for the sell-off wave from the 1.1014 top to the 1.0391 low. Aussie fundamentals have not been particularly compelling lately, but the market has been shrugging that off in favor of the focus on using the Aussie as a yuan proxy and playing its normal positive correlation with pro-risk trades like equities and commodities. There’s a train-wreck out there somewhere for the Aussie, but short term visibility is very poor.
Conclusion
So clearly, we’re at an interesting level in the USD, and the potential outcomes are endless as always – including a treacherous false break lower followed by no real follow through and choppy range trading, an outcome that would seem likely if the market decides to take it easy on committing to its positions over the heart of the summer period and the data and event catalysts prove inconclusive. Our preference remains for the USD to continue building a base and even rally eventually, though that view is certainly under heavy artillery fire from the equity bulls who have mounted an impressive blitz here. If that blitz survives earnings season and continues, any USD recovery may have to wait until fall.
So clearly, we’re at an interesting level in the USD, and the potential outcomes are endless as always – including a treacherous false break lower followed by no real follow through and choppy range trading, an outcome that would seem likely if the market decides to take it easy on committing to its positions over the heart of the summer period and the data and event catalysts prove inconclusive. Our preference remains for the USD to continue building a base and even rally eventually, though that view is certainly under heavy artillery fire from the equity bulls who have mounted an impressive blitz here. If that blitz survives earnings season and continues, any USD recovery may have to wait until fall.
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