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Talking Points:
- EUR/USD pushes into key support zone of 1.0850-1.0740
- USD/JPY rises above 100-DMA (113.15) on rising US yields, 115.20 in view
- DXY supported by favorable seasonality & 3-yr Trendline
US dollar strength picked up on Tuesday where it left off on Monday. The strength for the greenback was clearly seen against the haven currencies, the CHF & JPY, as well as EUR and AUD. Haven currencies have failed to rally as the CBOE S&P Implied Volatility Index or VIX closed on Monday at its lowest level since 1993. The Australian dollar, on the other hand, failed to find strength after being aggressively sold as Iron Ore continues its free fall due to fear of increasingly weak demand in China.
USD/JPY appears to be the clear USD play as JPY took over the weakest position in the G8 strong/ weak index on Tuesday, replacing the Australian Dollar. On Tuesday, USD/JPY traded above the 100-DMA, and we could be working on a move toward the early March high of 115.50 if the current environment remains undisturbed. Currently, the strongest G8 currency in early May is the British Pound, which will soon have ‘Super Thursday’ to help determine whether cable has further upside. According to data from the Depository Trust & Clearing Corporation (DTCC) that was gathered by Bloomberg, there is a developing theme of Bullish USD/JPY options (calls) that are spread out over the coming year. The most Bullish of the $12 billion in options favoring further USD strength was looking for a touch of 133 in USD/JPY by next year.
Recommended reading: Build Your Trading Plan around the Strongest Currencies
Short-term momentum remains in favor of USD. However, to get a better picture on what’s developing in EUR/USD, we should look to the short-term chart (shown below). While there are fundamental developments that favor further EUR upside, the chart needs to agree. An agreement from the chart may look like a failure for EUR/USD to break below the 1.0850/1.0740. If the price stalls above or in this zone, and then breaks higher, we could be resuming a move higher, which would favor a move into new 2017 highs. A break and close below 1.0740 would open up the view that DXY strength may be finding fresh favor across the board, and not just against weak currencies like AUD, JPY, & CAD.
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Closing Bell’s Top Chart: May 9, 2017, ST EUR/USD stares down key support at 1.0850/1.0740
Tomorrow's Main Event: NZD Reserve Bank of New Zealand Rate Decision (MAY 11)
IG Trader Sentiment Highlight: Contrarian View on CAC 40 encourages watching for a turn lower
France 40: As of May 9, retail trader data shows 46.6% of traders are net-long with the ratio of traders short to long at 1.14 to 1. In fact, traders have remained net-short since Apr 19 when France 40 traded near 5094.6; price has moved 5.7% higher since then. The number of traders net-long is 3.4% lower than yesterday and 108.9% higher from last week, while the number of traders net-short is 0.2% higher than yesterday and 37.7% lower from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests France 40 prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed France 40 trading bias.(Emphasis Mine)
The aggressive rise in long-positioning will take on more importance if price can break below chart support. Admittedly, we’re a long way from said support, which currently lies at the April 19 low at 4,978.7 or ~9% from Tuesday’s close.
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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