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US Dollar to Rebound as Stock Rally Runs Out of Steam

US Dollar to Rebound as Stock Rally Runs Out of Steam

2011-09-27 22:14:00
Michael Boutros, Technical Strategist
Share:
US_Dollar_to_Rebound_as_Stock_Rally_Runs_Out_of_Steam_body_Picture_2.png, US Dollar to Rebound as Stock Rally Runs Out of SteamUS_Dollar_to_Rebound_as_Stock_Rally_Runs_Out_of_Steam_body_Picture_3.png, US Dollar to Rebound as Stock Rally Runs Out of Steam

The greenback remained on the defensive today in North American trade with the Dow Jones FXCM Dollar Index (Ticker: USDollar) falling 0.42% on the session. The losses come on the back of a stellar performance in US equities which sharply faded just ahead of the close with the Dow, the S&P, and the NASDAQ advancing 1.33%, 1.07%, and 1.20% respectively. Stocks closed well off their highs as reports of dissention among euro zone leaders over the terms of Greece’s second bailout fueled concerns over the ongoing debt crisis in Europe. The move illustrates the level of uncertainty in financial markets as investors react to every piece of rhetoric coming out of the indebted region. And with more pressing US data on tap later in the week, markets participants may once again shift focus to global growth prospects.

The 20-day correlation between the dollar index and the Dow Jones Industrial Average hit record highs today at -0.88, suggesting that the greenback is likely to test recent highs if the rally in stocks subsides as expected. The index rebounded off daily support at the 9850 level after moving nearly 110% of its daily average true range. Key topside resistance holds at the 23.6% long-term Fibonacci extension taken from the June 8th and December 1st 2010 crests at 9970. A break above this level sees a test of the psychological 10,000 barrier.

US_Dollar_to_Rebound_as_Stock_Rally_Runs_Out_of_Steam_body_Picture_4.png, US Dollar to Rebound as Stock Rally Runs Out of Steam

A closer look at the index sees the dollar holding below interim resistance at the 9900 level with subsequent ceilings eyed at 9920, and the 161.8% Fibonacci extension taken from the August 1st and 17th troughs at 9960. As noted in yesterday’s USD Trading report, the index saw a test of the 9850 mark after breaking below 9900 early in the session. Interim support rests here with subsequent floors eyed at 9800 and the 100% Fibonacci extension at 9740. An RSI break above 50 supports the case for dollar strength moving forward, with the greenback likely to move higher if relative strength holds above oversold territory.

US_Dollar_to_Rebound_as_Stock_Rally_Runs_Out_of_Steam_body_Picture_5.png, US Dollar to Rebound as Stock Rally Runs Out of Steam

The greenback fell against three of the four component currencies today highlighted by a 0.73% decline against the aussie. As global markets advanced on hopes of a short-term relief from the sovereign debt threat, higher yielding currencies surged for a second day with the Australian dollar outperforming all its major counterparts save the kiwi which was the topic of today’s Scalp Report. However the rally in risk is likely to be short lived as interest rate expectations weigh on demand, with the aussie failing to break above parity in US trade. The yen was the worst performer of the lot, falling 0.71% against a weaker greenback as investors shunned the lower yielding haven currency throughout session.

Tomorrow’s economic docket is highlighted by the August durable goods orders at 12:30 GMT. The data is expected to confirm fears of a domestic slowdown with consensus estimates calling for a contraction of 1.0% after a positive print of 4.0% a month earlier. Although markets seemingly shrugged off today’s weaker than expected consumer confidence print, the data has the potential to refocus market participants on the domestic outlook with investors eyeing Thursday’s 2Q GDP print and Friday’s personal income/spending data. With a three day rally now on the books, markets could be poised for significant weakness in the days ahead with the dollar remaining the chief beneficiary of heightened risk aversion flows.

Upcoming Events

Date

GMT

Importance

Release

Expected

Prior

9/28

12:30

HIGH

Durable Goods Orders (AUG)

-1.0%

4.0%

9/28

12:30

MEDIUM

Durables ex Transportation (AUG)

0.2%

0.7%

9/28

12:30

LOW

Capital Goods Orders Non-Defense ex Aircrafts (AUG)

-

-1.5%

9/28

12:30

LOW

Capital Goods Shipments Non-Defense ex Aircrafts (AUG)

-

0.2%

Written by Michael Boutros, Currency Analyst for DailyFX.com

To contact the author of this report or subscribe to their daily analysis, please send inquiries to:mboutros@dailyfx.com

You can also follow Michael on Twitter @MBForex.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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