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DXY Tests Resistance As Yield Direction In Question

DXY Tests Resistance As Yield Direction In Question

2017-04-04 17:00:00
Tyler Yell, CMT, Currency Strategist

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Talking Points:

  • DXY Technical Strategy: Bias Lower Below 101
  • Macro backdrop and Fed speak does not seem supportive of correlated US Yields
  • DXY gaining against commodity FX, but on losing side of JPY over prior 5-days

The DollarIndex has traded higher since the last week of Q1 2017. Traders may do well to curb their enthusiasm as the move higher in recent trading days is coming off of the lowest level in 2017 that was traded at on March 27. The currency index has moved into the Fibonacci retracement range of 100.15-100.95, which markets the 38.2- and 61.8% retracement of the March trading range from 102.25 on March 9 to the March 27 and current 2017 low of 98.86.

Near-term resistance is a confluence of different indicators clustered around 101. The technical resistance points are comprised of the 61.8% retracement mentioned above, the Ichimoku Cloud on the daily chart, and the negative sloping Andrew’s Pitchfork drawn off the high close in early January. I will hold a bearish bias, and prefer USD strength only against weak FX absent a daily close above 101.95. For confirmation, I will also look UST 10-Yr yields, which hold a positive 20-day correlation of +0.45and UST 2-Yr yields with a similarly positive correlation of +0.525. The chart below has an overlay of the TNX (10-year yield), and you can see that if the relationship holds, it is difficult to see USD breaking higher without TNX doing so as well.

If the current move does prove to be a pull back in a downtrend, I will anticipate further JPY strength and eventual EUR strength while also watching GBP, which is trading at resistance. The EUR has been offered rather aggressively on a dual component of ECB talking down priced in rate hikes after the March ECB meeting as well as hedging activities to French Election risk.

The protection sought that has brought EUR down, and subsequently DXY higher, can be seen in the 1-month 25D Risk Reversal or Riskies, which show out of the money puts are trading at 130bp premium to calls. A Macron victory would be expected to halt the downside protection purchasing, which could lift EUR and drop DXY back toward the March 27 low or possibly to new 2017 lows.

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DXY Tests Resistance As Yield Direction In Question

Chart Created by Tyler Yell, CMT


Shorter-Term DXY Technical Levels: Tuesday, April 4, 2017

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.

DXY Tests Resistance As Yield Direction In Question

Contact and discuss markets with Tyler on Twitter: @ForexYell

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