Talking Points:
- USD/JPY breakdown caps USDOLLAR Index gains on the day.
- Gold rally may not be over - bullish flag/wedge developing.
- As market volatility rises, it's a good time to review risk management principles.
As we discussed in yesterday's morning note, the disparity in global equity markets - and their inherent weakness - wasn't necessarily translating into action for the US Dollar. It's thus not a surprise that the USDOLLAR Index is barely higher on a day when the Japanese Nikkei 225 (CFD: JPN225) fell by over -2% in cash hours and European equity markets are flirting with the same losses; pairs like USD/RUB and USD/ZAR are barely higher, though sitting near the top of recent ranges over the past month.
Chart 1: USD/JPY Daily Chart (July 2014 to April 2016)
The key to everything is the Japanese Yen. Indeed, when looking at the components of the USDOLLAR Index, there is general agreement for USD strength among AUD/USD, EUR/USD, and GBP/USD (to varying degrees). Yet with USD/JPY, the pair has fallen out of its two month-plus range and now threatens the key October 2014 ¥110.00 BOJ intervention level. Needless to say, this seems like the area for the BOJ to "check rates" in, as my colleague Kristian Kerr, Senior Currency Strategist notes. The psychological implications for such a breakdown are significant and were outlined in the March 20 article, "BOJ’s Patience Running Thin - USD/JPY to Prove Testy Around ¥110.00."
Chart 2: Gold (CFD: XAU/USD) Daily Chart (February 6 to April 5, 2016)
Elsewhere, traders may want to pay attention to precious metals, particularly Gold (CFD: XAU/USD) from the long side again. For the past few weeks, Gold has been trading lower after what appeared to be an exhaustion move to the upside. However, when drilling down to the H4 timeframe, it seems that Gold may have simply been 'catching its breath' before its next move up.
Over the next few days, the bullish flag/falling wedge that's formed should be an opportunity (either long on a breakout or short on a failure) to monitor - a daily close through $1240 would increase confidence in a move to the topside.
See the above video for a technical review of the USDOLLAR Index, AUD/USD, EUR/USD, EUR/GBP, the S&P 500, the DAX 30, the Nikkei 225, USD/JPY, and EUR/GBP.
Read more: EM FX More Reliable than Equities for Risk Trends Around USD
If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
--- Written by Christopher Vecchio, Currency Strategist
To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com
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