Stocks are very well bid, with some major indices sitting at 2-year highs, currencies continue to rally against the USD, and the race to see who can devalue their currency the quickest is in full swing. It seems as though almost every economy is not happy about a strong currency at present, with most of the Asian governments, a good deal of European governments, and South American’s as well, all seriously concerned with the potential impact of a stronger local currency on the respective economies. Clearly the threat of a stronger currency compromises some very solid export markets, and with the USD losing value, these economies are at risk of losing business from a mighty big customer.

It is quite evident that the very real prospects of QE2 in the US has killed the Greenback over the past several days, and there is very little in the way to stop the buck from sliding further in light of the outlook for Fed monetary policy. However, we do see the potential for a ramping up of official talk on the weak Dollar to start making the rounds (similar to the campaign we saw when the Euro was rallying to 1.6000 a few years back), which could be the very catalyst to start to inspire some profit taking on USD shorts and possibly ignite a much needed and healthy corrective rally for the Dollar.

Inter-day technical readings certainly show the need for some USD appreciation, with the Euro well overbought on the daily charts. The latest rally in the major has been most impressive, with the single currency putting in 18 consecutive closes higher than the previous daily low. As such, in our opinion, in order to see a technical reversal start to play out, we would need to see the Euro close below the previous daily low to break this sequence and open the door for deeper setbacks. Right now, that key level to watch is a good ways away by 1.3620, and at this point, a close below this level seems like a remote possibility. But when we finally do see a close below the previous daily low, we expect to see the onset of a material correction in favor of the USD which should extend into other markets.

The economic calendar in Asia has been anemic, with China and Australia closed for holiday, and the only notable release coming in the form of flat August wage growth in Japan, which has hardly factored into price action. The Yen has however been moving a bit, with the currency selling off after Usd/Jpy was very well supported ahead of 83.00. Technically, there is the potential for a bullish reversal day in Usd/Jpy should the market be able to manage a close above 83.30 on Monday. A bullish close would be welcome after the market has been in a straight shot decline for practically 2 weeks.

Looking ahead, Eurozone Sentix investor confidence (8 expected) is out at 8:30GMT, along with UK construction PMI (51.4 expected). Eurozone producer prices (0.2% expected) then cap things off for the European calendar at 9:00GMT. Also of note, the Bank of Japan kicks off its 2-day policy meeting today. US equity futures and commodity prices are flat, with gold trading just off its record highs.

Written by Joel Kruger, Technical Currency Strategist

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