Major Resistance Ahead: Don’t Count the Dollar Out Yet
MAJOR RESISTANCE AHEAD
We are finally starting to see a bit of movement in the major currencies, with the Euro breaking out of a multi-day consolidation against the buck and pushing to fresh multi-week highs beyond 1.3650. The market now has its sights set on the establishment above the yearly high from back in February at 1.3710. Technically, things will get even more interesting if the Euro actually manages to hold above 1.3710, as the longer-term dynamics come into play. If we look back at EUR/USD from the 2008 record highs to present, it is quite clear the the market has been locked in a downtrend, putting in a series of key lower tops. The downtrend resistance line off of that move now comes in around 1.4000, suggesting that we could see another topside failure around the major psychological barrier. So even if we do establish back over 1.3710, there is a real possibility that any additional upside from there will be limited to the 1.4000 area. As such, the best play right now is to stand aside and wait to see if this market can race towards 1.4000 over the coming sessions. At that point, interday studies will most likely be tracking in overbought territory, with the market also testing major longer-term trend-line resistance. This will be the best time to take a shot at fading the strength. The key level to watch below comes in all the way down at 1.3460, and only a break back under this support would alleviate immediate topside pressures.
HOW TO RECONCILE?
Fundamentally, it has been difficult to reconcile the recent price action. Is the US Dollar in decline because market participants are feeling better about taking risk now that the US government resolution is behind us and Fed policy is likely to remain as is into 2014, or is the US Dollar under pressure because the markets realize that the US government resolution was only a temporary fix and that the structural issues associated with a ballooning debt crisis, elevated unemployment, and stretched to the max Fed, do not make a good recipe for wanting to be anywhere near the US Dollar? While the reaction in the US equity market on Thursday might suggest that it is the former, I would also not rule out the latter. Price action in the equity market has not served as a good barometer for what is really going on. We all know that stocks have been driving higher on Fed support, and nothing else matters. So long as monetary policy stays as is, stocks will be inclined to push higher and higher, as ridiculous as this sounds.
A RELIABLE INDICATOR
I would however suggest that the price action in one currency market could actually offer some perspective on Thursday’s price action. If we look at the price action in EUR/CHF yesterday, we can see that this risk sensitive cross rate, was actually lower on the day. Given the broad sell-off in the buck and rally in stock prices, it would have been logical to assume that EUR/CHF would be tracking a good deal higher on the day with the risk on correlations. And yet, this was not the case. EUR/CHF was at one point down a good amount on the day, and though recovering from the lows, still managed to close lower. My point with all of this is that we should not be thinking that we are necessarily back in risk on territory. To the contrary, it is quite possible that we are in the final panic rally in stock markets before everything comes crashing down. As for the US Dollar, I would not count it out just yet. Though we may very well see additional USD weakness in the sessions ahead, when US equity markets finally relent (and they will), I suspect this will send ripples into the global economy that fuel more risk liquidation abroad inspiring a flight to safety mentality. This should ultimately still end up benefiting the buck.