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Q2 Preview: USD Weakness, Yen Strength, Equity Vol in the Spotlight

Q2 Preview: USD Weakness, Yen Strength, Equity Vol in the Spotlight

2018-03-29 19:13:00
James Stanley, Currency Strategist
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In this webinar, we used price action to look at macro markets as we near the end of Q1 and open the door into the second quarter of 2018. There are a number of interesting themes as we open the door into April, key of which has been a noticeable pickup in volatility across US equities from January to March. We also looked at how this might be related to moves in US Treasuries and the US Dollar, which, in-turn, has brought impact to major pairs such as EUR/USD, GBP/USD and USD/JPY.

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Stocks Begin to Shake After Fresh Highs in January

As we close the door to Q1, probably one of the more notable takeaways is the increased volatility in US equities that’s shown up since those fresh highs that were set in January. Fresh highs in January led to a brisk sell-off in early-February; and while we put in a 78.6% recovery of that sell-off, bears remained active to push prices right back down in March. This increasing volatility after an extended bullish run highlights the fact that the buy-the-dip strategy of old may not be carrying the same impact. And this could even lead to a move-lower in equity assets as we move deeper into the year.

US Dollar

The US Dollar has remained weak for over a year now, with as much as 15% taken out from the 2017 high down to the 2018 low. In January, a long-term Fibonacci level came into play around 88.42. That level was tested again in February but, to date, has not been taken-out by a sustained break. We had seen something similar in September of last year around the 50% retracement of that same move, which had led into about two months of strength. The difference in this instance from the prior is the fact that bears have remained rather active, continuing to show resistance inside of the 91.01 level that had functioned as the 2017 swing-low in DXY. This keeps the door open for the short-side of the Dollar as we walk into Q2.

EUR/USD Gets Shy at 1.2500

We saw EUR/USD pull back after failing to break through the 1.2000 level late last year, and we’ve seen something similar playing out at the 1.2500 level so far this year. Bulls haven’t lost enthusiasm, as there’s been a build of support at levels underneath current prices, with a large portion of the quarter seeing support play in at 1.2167, 1.2213 and 1.2281. We looked at a topside setup in the pair as part of a pair-trade yesterday, coupled up with a short-side EUR/JPY setup.

The Bulls are Back in the British Pound

GBP/USD spent most of last year trending-higher, spending a large portion of that move within an upward-sloping channel. After hitting a fresh post-Brexit high in January, a retracement started that kept prices heading-lower along a bearish trend-line. That bearish shorter-term trend was broken in mid-March, and prices have since pushed up to a fresh seven-week high, giving the appearance that topside continuation in GBP/USD may be a little closer to ready than what’s currently showing in EUR/USD. At this point, the big level to watch is the 1.4000 swing, and if we can hold above there, the topside remains attractive.

USD/CAD With Bullish Potential in Q2

Another notable takeaway from Q1 has been just how weak the Canadian Dollar was. While the US Dollar wasn’t exactly burning higher on many charts, USD/CAD showed a rather pronounced bullish breakout that eventually saw the pair trade over the 1.3000 psychological level. We’ve since pulled back and there’s been some support showing throughout March around the 1.2800 level. Short-term resistance appears to be coming from the 50% retracement of the May – September 2017 major move.

USD/JPY’s Bearish Break Puts the Spotlight on Yen for Q2

One of the more surprising element from Q1 has been strength in the Japanese Yen, and this can be coupled with the surprising sense of strength that’s shown around Japanese inflation. Japanese inflation continues to hold around three-year highs, and this has created a spate of Yen strength in 2018 that’s helped USD/JPY breach below some really big, long-term support levels. This bearish trend faced a stiff test as yesterday’s USD-strength volleyed prices higher; but resistance came-in around a bearish trend line that does keep the door open for short-side continuation. If this shorter-term point of resistance cannot hold, there are a few levels a bit higher on the charts that can similarly be used for such a purpose.

NZD/USD Long-Term Range May be Conducive for USD-Strength

On the long side of USD, one of the more attractive pairs appears to be NZD/USD, which has been in a range-bound condition for well over a year now. The resistance side of that range is marked by the 38.2% retracement of the 2009-2011 major move, with the 50% retracement of that same study helping to set support. Over the past few weeks, we’ve seen prices starting to leave that zone of resistance, opening the door to the possibility of the longer-term range filling in on the short-side.

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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--- Written by James Stanley, Strategist for DailyFX.com

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