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US Dollar, Japanese Yen to Weaken as Risk Appetite Returns (Candlestick Weekly)

Tuesday, 04 November 2008 08:27:46 GMT  |  Ilya Spivak, Currency Analyst

The US dollar and Japanese Yen have seemed unstoppable, shattering all hope for a retracement as they pushed steadily higher against other major currencies. Now, the dollar’s momentum looks to be losing steam against the major forex currency pairs, finally opening the door for a correction to offer advantageous entry opportunities.

EUR/USD


The case for Euro upside remains intact

We sold EURUSD at 1.5510 having identified a Long Black Candle that closed beyond trend line support. The pair is now trading at 1.2624 bringing our floating profit to around 2886 pips. Last week, we we suggested the pair had scope for a bullish correction to test the downward sloping trend line established from the high in mid-July. As it stands, the bears retained momentum and EURUSD pushed yet lower. Still, current positioning holds potential for an upside retracement. Price action is setting up a Falling Wedge bullish reversal formation, with confirmation offered by positive divergence with the 14-day RSI oscillator. Most recently, the pair issued an Evening Star at the Wedge top, suggesting downside momentum in the very near term. We will look for the pair to find support near recent lows in the 1.23-1.25 area and extend higher to offer another opportunity to sell.


EUR/USD Strategy

1. Continue holding short EURUSD at 1.5510, looking to add.

2. Move stop loss to 1.4893.

3. Next “soft target” aims for a test below 1.2160. 



For more resources on the EURUSD, please visit the DailyFX Euro Currency Room.




GBP/USD


Pound signaling possibility of near-term upswing

British Pound positioning is nearly identical to that of the Euro. We see the same falling wedge, the same positive divergence, and the same Evening Star. Naturally, our approach here will be much the same as well: we will look for support to develop at recent lows, with a subsequent bullish correction above the wedge top for a short entry opportunity. Besides pure technical positioning, the case for an across-the-board US Dollar correction is borne out in the fundamentals. As credit market conditions have started to normalize, investors have begun to cautiously move capital out of safe-haven assets (i.e. the greenback) and back into equities. This has produced an impressively strong inverse correlation between the US dollar and the MSCI World Stock index. A retracement in USD-based pairs is therefore likely as the excesses of panicky markets are corrected before the broader downtrend resumes course.


GBP/USD Strategy

Pending short. Updates will be posted throughout the week at the Candlestick forum. 



For more resources on the GBPUSD, please visit the DailyFX British Pound Currency Room.




USD/JPY


Yen to weaken as capital leaves safe-haven assets

The Yen continued to gain ground as risk aversion fueled by fears of a global economic slowdown swept across the markets. Most recently, we have seen modest normalization on stock exchanges produce a bounce to test support-turned-resistance at 99.12. This level also coincides with a downward-sloping trend line connecting the highs since late September. If our broad scenario calling for a corrective rebound in risky assets proves correct, the Yen should lose ground as the perennial safe-haven forex outlet. To that effect, we will remain on the sidelines for the time being as we see how the bulls reconciles their present hurdle.


USD/JPY Strategy

Flat. Updates will be posted throughout the week at the Candlestick forum. 



For more resources on the USDJPY, please visit the DailyFX Japanese Yen Currency Room.




USD/CAD


Is the retracement over?

Our calls for a correction US dollar strength found modest validation in the Canadian Dollar pairing: USDCAD out in a Dark Cloud Cover reversal formation on a test of the 1.13 mark and broke sharply lower, taking out a supporting trend line that had been in effect since late September. Prices have apparently found initial support above the 1.1472-1.1780 price congestion area. We will look for signs of a bullish reversal to enter long. Otherwise, we remain on the sidelines as the retracement plays out.


USD/CAD Strategy

Pending Long. Updates will be posted throughout the week at the Candlestick forum. 



For more resources on the USDCAD, please visit the DailyFX Canadian Dollar Currency Room.




AUD/USD


Divergence hints at bullish reversal

The past month has seen the Australian dollar oscillate lower in a downward sloping channel. The most recent upswing has formed an Advance Block formation with bearish candle confirmation, a strong indicator of a reversal downward. And yet, we also note steep divergence with the RSI oscillator, pointing to the conclusion that bearish momentum is losing steam. While this setup does not as closely resemble EURUSD as the British Pound, the parallels are too significant to ignore. Further, it must be considered that the Australian Dollar’s status as a “high-yield” currency had placed it at the heart of the selloff as investors fled from risk. Should these assets see near-term rebound as we suggested above, surely AUDUSD would have fundamental impetus for gains. To that effect, we will remain on the sidelines as we to see if our preferred scenario indeed develops as expected and offers better entry points to position for US dollar strength.


AUD/USD Strategy

Pending Short. Updates will be posted throughout the week at the Candlestick forum. 



For more resources on the AUDUSD, please visit the DailyFX Australian Dollar Currency Room.




NZD/USD


Another divergence, another rally?

New Zealand dollar positioning is very close to that of its larger antipodean neighbor. We see a downward-sloping channel tempered by the now-familiar positive divergence with the RSI oscillator. Importantly, resistance is stronger for NZDUSD as the top of the channel coincides with the lower boundary of a range that had contained the pair through much of October near 0.59. Still, the same argument as that for the Aussie should hold for the Kiwi’s in a return-to-risk scenario: as the markets correct the over-reach seen when hysteria overtook price action amid the credit crisis, NZDUSD should see temporary upside before the dominant down trend resumes. As such, we will remain flat here too as we wait for a more lucrative selling opportunity.


NZD/USD Strategy

Pending short. Updates will be posted throughout the week at the Candlestick forum. 



For more resources on the NZDUSD, please visit the DailyFX New Zealand Dollar Currency Room.



To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com

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