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US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

Christopher Vecchio, CFA, Senior Strategist


The Dow Jones FXCM Dollar Index (Ticker: USDOLLAR) is falling fast in pre-North American trading hours today, for no real rhyme or reason, but rather, what is tentatively being viewed as month-end flows and profit taking. The US Dollar, expressed by the USDOLLAR Index, was up +4.07% on the month before today’s open, quite a strong move for any currency, particularly one that remains hampered by an ultra-dovish central bank policy regime.

Nevertheless, after an exceptionally volatile month in the safe havens, the commodity currencies, and the European currencies – actually, across the entire FX landscape – it wouldn’t be entirely surprising to see a major dislocation over the next several days as profit is taken. Key questions linger in traders’ minds: will the Fed taper QE3 beginning in June, September, or December; will the ECB implement negative rates to try and spur lending; will the BoJ be able to prevent turmoil in JGBs and keep the Nikkei chugging along, at the Yen’s expense; and are the Aussie and Kiwi selloffs warranted given the increasingly excessive negativity on China?

While we await these answers over the next several weeks and months, the one that is most likely to be answered in the immediate future is whether or not the ECB will implement negative rates. The past several days, several ECB policymakers have been making the rounds touting their respective views on monetary policy, and just like the Fed’s collective view on tapering QE3, there is no consensus on implementing negative rates by the ECB. This is important as there is an ECB policy meeting next Thursday, at which point this issue will be looked at directly. Given the negative impact speculation has had on the Euro, any such signs that negative rates are unlikely could provoke gains in the Euro, especially against the US Dollar.

Taking a look at European credit, stronger peripheral yields alongside weakness in German bonds has the Euro strengthening versus the US Dollar this morning. The Italian 2-year note yield has increased to 1.425% (+6.7-bps) while the Spanish 2-year note yield has increased to 1.843% (+7.6-bps). Likewise, the Italian 10-year note yield has increased to 4.121% (+9.1-bps) while the Spanish 10-year note yield has increased to 4.331% (+6.0-bps); higher yields imply lower prices.


JPY: +1.03%

CHF: +0.91%

EUR: +0.46%





Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.26% (-0.24% past 5-days)


US_Dollar_Starts_Slide_in_Europe_Euro_Franc_Surge_as_US_Trading_Approaches_body_Picture_1.png, US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

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US_Dollar_Starts_Slide_in_Europe_Euro_Franc_Surge_as_US_Trading_Approaches_body_x0000_i1028.png, US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

EURUSD: Yesterday I said: " I thus maintain a bearish bias, but a close > 1.3000/30 will negate and imply a rally towards 1.3220/50 (mid-April swing highs). To the downside, a break of 1.2795/800 would confirm the move towards 1.2750 and 1.2680.” Now it appears a Symmetrical Triangle has formed on the daily chart, and given the move lower, my initial feeling is that this is a consolidation waiting to break lower. As the range plays out, I’m in wait-and-see mode.

US_Dollar_Starts_Slide_in_Europe_Euro_Franc_Surge_as_US_Trading_Approaches_body_x0000_i1029.png, US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

USDJPY: Price failed to retake ¥102.50 last night and today, and trading in the European session has seen the USDJPY plummet back towards 101.00, although the pair was seen steadying just above at the time of writing. Overall, price is relatively unchanged from the past several days, with the 21-EMA pacing the ascending trendline support off of the April 2 and April 31 lows as support, holding today once more. Although the daily RSI uptrend appeared to be back in play, today’s selling has a clear break once more. A further breakdown through trend support eyes a move towards 100.00, then 97.50.

US_Dollar_Starts_Slide_in_Europe_Euro_Franc_Surge_as_US_Trading_Approaches_body_x0000_i1030.png, US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

GBPUSD: Although my $1.5015 target was reached, price has rebounded and is relatively unchanged the past week, with momentum higher picking up at the time this report was written. I continue to eye the 8-EMA, which has served as resistance since early-May, and as such I look to sell rallies on ‘touches’ of the 8-EMA. With a new low set today, the bearish bias is valid unless 1.5165 trades.

US_Dollar_Starts_Slide_in_Europe_Euro_Franc_Surge_as_US_Trading_Approaches_body_x0000_i1031.png, US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

AUDUSD: The past several weeks I’ve maintained: “a deeper pullback towards 0.9580 and 0.9380/400 is beginning.” Price has been steady below the ascending trendline off of the October 2011 and June 2012 lows, suggesting that a top in the pair is in place, going back to the July 2011 high at 1.107. I maintain that I’m awaiting a monthly close below $0.9860, but that seems all but guaranteed with two days left in the month. The first target of 0.9580 was hit overnight and I expect a reaction at this level, given its significance as the 50% Fibonacci retracement from the May 2010 low to the July 2011 high, as well as the 2012 low set (coincidentally) this week last year. In the very near-term, with the weekly RSI at the lowest level since the height of the global financial crisis in the 4Q’08, the AUDUSD is probably close to a point of near-term exhaustion. Rebounds should be sold.

US_Dollar_Starts_Slide_in_Europe_Euro_Franc_Surge_as_US_Trading_Approaches_body_x0000_i1032.png, US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

S&P 500: No change as the intraweek Bull Flag broke to the upside and hit top rail resistance at 1665 on Friday: “The headline index remains strong although there is some theoretical resistance coming up (this is unchartered territory, so forecasting price relies heavily on valuations, mathematical relationship, and pattern analysis)…It’s hard to be bearish risk right now, but it is worth noting that the divergence between price and RSI continues, suggesting that few new hands are coming into the market to support price (recent volume figures would agree).” Channel resistance from mid-April comes in at 1670, while support is at 1648 (8-EMA) and 1642 (steep channel support).

US_Dollar_Starts_Slide_in_Europe_Euro_Franc_Surge_as_US_Trading_Approaches_body_x0000_i1033.png, US Dollar Starts Slide in Europe; Euro, Franc Surge as US Trading Approaches

GOLD: No change: “If the US Dollar turns around, however (as many of the techs are starting to point to), then Gold will have a difficult gaining momentum higher. Indeed this has been the case, with Gold failing to reclaim the 61.8% Fibonacci retracement of the April meltdown at $1487.65, only peaking above it by 35 cents for a moment a few weeks ago.” Price is back under 1400, and if US yields keep firming, a return to the lows at 1321.59 shouldn’t be ruled out.

--- Written by Christopher Vecchio, Currency Analyst

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