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US DOLLAR Technical Analysis: Score One For Seasonality

US DOLLAR Technical Analysis: Score One For Seasonality

2016-04-28 13:55:00
Tyler Yell, CMT, Currency Strategist
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Talking Points:

  • US Dollar Technical Strategy: Short Bias Favored Below 11,895
  • 21-DMA Continues To Act As Firm Resistance on Move Lower
  • Macro Environment Shifting To a Dollar Negative Narrative

April has shaped up to be a rough month for the US Dollar, again. Last April, many were convinced the US Dollar had topped, but that sentiment only lasted until Mid-May where the US Dollar would then go on a 8 Month Run to top out again in January on a Negative Interest Rate Announcement by the Bank of Japan.

The question for all traders is, what’s next? While some would like to think that a May Rally, May is a seasonally bullish month for the Dollar for what it’s worth, there are a few reasons this may not come to pass.

First, Central Bank rhetoric has fundamentally changed in the last year, and really in the last two months. Specifically, we’ve seen the Federal Reserve become relatively dovish to where they’ve stood in the past whereas other central banks like the European Central Bank, Bank of Japan, and recently the Reserve Bank of New Zealand have stood pat on monetary policy. The non-US Central Banks have favored waiting to engage in more stimulus, which was currency strengthening because of what was priced in while the Fed is slowly convincing the market that their four rate hike prediction via the dot plot at the December meeting may only come half-true at best. This new narrative has led to multiple re-adjustments as to the appropriate narrative to trade in the markets.

We’ve Just Hit A Corrective Equality Point with the March 2015 Correction

US DOLLAR Technical Analysis: Score One For Seasonality

Lastly, it’s important to note that a driving force for the US Dollar had been hedge funds and other institutional speculators. This source of support has all but dried up. Looking at the recent Commitment of Traders report from the CFTC, the difference between the Commercial Hedgers and Institutional Speculators is at a 52-week extreme with hedgers long, and speculators short as speculators are the shortest they’ve been since Summer of 2014.

Additionally, one environment that has favored US Dollar strength has been volatile environments. Recent Macro Events have passed with eyes now focusing on Brexit as the next key event risk, which is nearly 2-months away. Ironically, to the note above, we could be entering a grind lower in the US Dollar like we also saw in the low-volatility environment of 2014.

Therefore, the Fed and the large traders in the market do not appear to support a higher US Dollar. At least, for now.

Shorter-Term US Dollar Chart Favors Focus on 21-DMA & 11,907

US DOLLAR Technical Analysis: Score One For Seasonality

In the chart above, you’ll note that the top line of the channel hasn’t been touched apart from the later February high where the channel was originated. The upper channel line aligns with the April 27, 2016, high around 11,907, which is also the FOMC high and should be respected as resistance. The Thursday morning low aligned perfectly with the 2016 low at 11,784, which will be the key support in focus.

Beyond these recent extremes of 11,907 and 11,784 traders can look to two key pivots. On the top side, the recent aggressive move lower was seen at 12,030. A break above 11,907 followed by 12,030 could well signal that a significant correction or a resurgence of Dollar Bullishness, which would align with the May Seasonality patterns.

Below the current 2016 low of 11,784, traders can look to the June 18 low of 11,732 followed by the May 15 low of 11,634. You’ll also see on the first chart that US Dollar is resting on the floor of a 1-year channel. Given the environment we see now, a break below appears to be the higher probability view as opposed to Dollar buying beginning aggressively.

Shorter-Term US Dollar Technical Levels

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.

US DOLLAR Technical Analysis: Score One For Seasonality

Interested In our Analyst’s Longer-Term Dollar Outlook? Please sign up for our free dollar guide here.

T.Y.

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