Currency Overview: Dollar Strength from Declining Equity Markets

Overall, the dollar index strengthened across the board in Tuesday trade, in repose to the decline in futures, and cash, equity markets. With the declines seen over the last period, some of the major pairs have reached critical swing area, which previously had acted as significant support or resistance areas. Ahead, the calendar is clear of any red flag reports during the upcoming U.S. session, which might allow the currency valuations a fair chance to complete their technical and fundamental plays.

Dollar Index Technical View: TheLFB Member Charts

4 Hour Chart: Mixed. Main price points: 74.95, and 76.57. Looking for: Wave ii

The dollar index is trading higher, and very close to the 76.57 top, where a possible break will put the higher black wave iii shown, in play. If this resistance area holds, the move of a corrective wave ii, with wave c down to 50% or 61.8% retracement areas, is still possible.

This long wave count stays valid if the 74.95 area holds as support. Any break of this low will invalidate the wave count, as wave two must not make a retrace of more than 100% of the wave one distance

The euro (Eur/Usd 1.4660) has lost 140 pips since the beginning of the European session, in-line with the global equity markets losing value. Right now, the euro is trading just above the 50-day moving average, a support area under which the pair broke the last time in April 09.

The pound (Gbp/Usd 1.6315) fell some 100 pips during the European trading hours, but as soon as it touched the 1.6280 area, the pair surged 60 pips, up to TheLFB S1 (1.6325). If the pound breaks below the 1.6280 area, it will run into 1.6250, where the 50 and the 100-day moving averages meet.

The aussie (Aud/Usd 0.8940) advanced 65 pips during the Asian session, ahead of the interest rate decision from the RBA, but the started declining inline with negative equity sentiment that was allowed to strengthen off the closed Japanese markets, and even though the RBA raised rates 0.25%, up to 3.5%. Since the high touched during the Asian session, the aussie has lost 170 pips. On the daily chart, the aussie is approaching a trend-line that has been holding the market since mid-July. A break below this price point will probably extend the current downtrend.

Trade Plan of the Day: TheLFB Trade Plan is Aud/Usd, one of the six that are available to members on the major pairs each day, plus four Jpy based cross pairs, plus S&P futures, oil, gold, and the dollar index.

The cad (Usd/Cad 1.0825) spent the last few days of trading consolidating in the 1.0800 area. The overnight session was no exception, with the cad testing the 1.0840 area, the same place where the market topped over the last four days of trading.

The swissy (Usd/Chf 1.0310) after a flat Asian session, the swissy had mainly one trading direction, only up. Since the London open, the swissy advanced 130 pips, probably having one of the strongest trading sessions of the last few weeks of trading. For the moment, the swissy is trading at the highest level in almost a month.

The yen (Usd/Jpy 90.15) had a rather slow overnight session, moving only 60 pips since the day started. Currently, the yen is trading in the 90.00 area, which has been an important swing point over the last two months of trading. A bounce from this area will probably send the pair towards 92.00.

Disclosure: No positions

Comments

[Mad Hedge F...:]

nji I know what keeps Obama awake at night. Let’s say we spend our $2 trillion in stimulus and get a couple of quarters of weak growth. Then once the effects of the stimulus wear off, we slip back into a deep recession, setting up a classic “W.” Unemployment never does stop climbing. This happened to Roosevelt in the thirties. So congress passes another $2 trillion reflationary budget. Everybody gets wonderful new mass transit upgrades, alternative energy infrastructure, and bridges to nowhere. But with $4 trillion in spending packed into two years, inflation really takes off. The bond market collapses, the dollar tanks big time, gold goes ballistic to $5,000, and silver explodes to $50. Ben Bernanke has no choice but to engineer an interest rate spike, taking the Fed funds rate up to a Volkeresque 18%. Housing, having never recovered, drops by half again. This all happens in the 2012 election year. Obama is burned in effigy, a Mormon is elected president, and the Republicans, reinvigorated by new leadership, retake both houses of congress. We invade Iran. Crude hits $500. This is not exactly a low probability scenario. Remember Jimmy Carter? This is why junk bond yields are still stubbornly high at 12.5%, and credit default swaps live at lofty levels. Are the equity markets pricing in this possibility? No chance. The risk of Armageddon is still out there. Personally, I give it a one in three chance. Pass the Xanax.

Nov 03 11:01 AM