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What a difference a few weeks make. Just 2 weeks ago, the dollar index was on its way to breaking past the 87 area but then the weak economic trend flooded the market and down goes the greenback!

Interestingly enough, a trader I follow, who has been extremely bearish on the dollar, turned bullish going into the Fed meeting last week only to have his head handed to him over the past few days. And then on Friday, all I heard was that the next leg of the dollar’s decline was imminent. Is this true? No. I think that if the dollar can finish strong on Tuesday, it will keep the uptrend in play. It has been very choppy but nonetheless higher since the lows from 85 areas earlier this year.

But is there a catalyst at the current levels? On Tuesday, two reports are coming out that could make or break the dollar. First is the Chicago PMI and the other is the Conference Board Consumer Confidence Index. The former was red hot last month while the latter is in positive territory over 100 and expected to jump markedly to the 108 level. I would imagine that if both of these reports come in stronger than expected, the greenback will get a nice bounce into the month's end. Thus, the uptrend will still be in play.

But if these reports come in weaker than expected, that could be a problem for my outlook. It would not necessarily signal a major breakdown is coming because the selling pressure DM is not that strong. However, it would put a crimp into the buying pressure DM model.

Furthermore, it would reinforce the intermediate term chart and confirm a reversal on the weekly chart from a hammer on last week's close. But one major variable to consider is this: Friday’s nonfarm payroll data. A weak data point on Tuesday and confirmed on Friday thanks to a weak jobs data could lead to some swift selling of the dollar.

So in short, I am looking to Tuesday’s data to either reinforce my thoughts or spit them back in my face. Till then, I remain bullish (and long the dollar index).

Here are some other currency thoughts.

Australian Dollar Rocking

A few weeks back, I argued that the Aussie dollar would break down thanks to a doji reversal that came into play on last month's close. Since that note, the currency has roared higher against my call which much thanks to the action in commodities and stronger domestic economic data. It has not taken out the doji resistance levels but it is getting darn close. A break above this doji level near 78 and traders could be looking at 80 next. However, at the moment, that resistance level has not been taken out so I remain bearish (and hurting since I am trading it short). At the same time, there was a gap up on the candle charts this past week – such formations are generally followed by continued strength.

Australian dollar index


British Pound Getting Support from the Bank of England

The Bank of England is starting to sound a bit hawkish but the markets are not so sure they will hike at their next meeting. This may be part of the reason that the currency has not broken out to the upside vs. the US Dollar. Technically, the trend is still bullish for the GBP but has not really done much over the last quarter. Shorter term, the trend looks like it is becoming increasingly bullish which puts the currency on firm footing. Long term trend up, intermediate term trend up and the Bank of England getting a bit more hawkish. In terms of my current trade in the MIR 2 futures portfolio, I am short but way out of the money. My stop sits above 1.90.

Canadian Dollar not acting Loonie
The Loonie has been finding more sellers lately than buyers thanks to the weakness in crude. Over the past few years, the uptrend in the Loonie was highly correlated to crude prices. With crude basically doing nothing over the past month, the Loonie has found itself focusing on local domestic central bank wording which has been a non-event from my perspective. At this point, the long term chart has lost the crude support but the DM pressure models are not doing much of anything (i.e. selling pressure and buying pressure unwinding). Shorter term, the currency is showing support from a weakening dollar index and weakening selling pressure (but buying pressure not rising). Overall, I would put the Loonie in the Neutral camp waiting for a signal.

ECB to Pause. Will It Hurt the Euro?
There has been chatter in the markets over the last few weeks that the European Central Bank [ECB] would take a similar tact as the Federal Reserve and go on pause after a hike at their next meeting. Perhaps, as this is a major reason for the Euro’s lack of movement over the past 5 months. The buying pressure DM is now below mid-line pointing to very little buying support. Selling pressure is rising which could lead to a bigger fall for the Euro in the coming months. Conversely, I am on the long side of the contract at the moment so we’ll see where things take us from here.

Rally for the Yen in Store?
I have heard various reasons to own the Yen over the last few years but none have actually resulted in a bullish profit (or interested me for that matter). So when I read another article about the Yen from Howard Simons at Realmoney.com, I wondered if I should believe it.

Well, he brings up some very interesting points. First, there is a record amount of shorts on the Yen reflected in the the COT data from the CFTC (as of his article – I don’t actively follow the data from a week to week perspective). He also mentions that short term policy is no longer supportive of the dollar as the Bank of Japan continues to tighten things. Finally, he argues that volatility is a key factor to follow and argues for a turn in the currency by March of next year.

Are all of these relevant points? Yes, to some extent, but I have made a habit of not trading currencies off fundamentals alone. I use the charts and the charts currently tell me that the selling pressure is rising, the Yen is still stuck in downtrend thanks to a doji reversal a few months back and there are still too many bulls on this trade from the analyst community.

Shorter term though, the chart has reversed nicely off the lows filing some gaps lower from the past few weeks. If this were to continue into next month, it could set up a test for the JPY to the previous doji reversal point – near .88. I am currently flat the position looking for a shorting opportunity.

Yen index


Other Currencies

The Kiwi has been on a roll over the last few months which thanks to the economic situation improving and a tighter Central Bank (from wording that a hike is coming soon, it appears). The traders I talk with really like this currency and based on the formation in the charts of this month, I could see further gains vs. the USD ahead.

As for the Swiss Franc, this chart looks like a combination of the Euro and the Pound. It has some bullish characteristics but for the most part, the same lax pattern of trade that the Euro has portrayed. Selling pressure is about to turn up as buying pressure unwinds. The CHF could be an interesting currency to play from the short side in the month ahead.

Source: Currency Overview: Expect a Big Week for the Greenback