The euro is leading the charge against the dollar today. There was some talk of reserve manager interest, but the price action must largely be understood as position adjusting ahead of Bernanke's Jackson Hole speech. News that Draghi is not going to attend the confab after all, generated much grist for the rumor mill, but substantively, we argued that there was not much new he would say in the U.S. about the future of ECB policy.
The euro is enjoying a strong bounce off the four-day low seen in Asia that entered the support zone we identified here in the $1.2420-60 area. Although the intraday momentum studies are stretched, there is scope for additional follow though gains over the next couple of days. We continue to see a break of $1.2600 spurring euro gains toward $1.2700.
At the same time, we continue to look for some technical sign that what we think is an upside correction in the euro has run its course. This kind of strategy is designed to help minimize the risk inherent in picking tops.
Sterling's pullback had been deeper than the euro's. Given how narrow Monday's trading range was, in part due to the bank holiday in the U.K., we would not read much into the pending outside up day (sterling traded on both sides of yesterday's range and may finish the North American session above yesterday's high of about $1.5830).
Yet it does suggest the reversal pattern in sterling on August 23 has run likely run its course. Ideally, sterling would now rally to retest that day's high near $1.5910 and fail. This would generate another bearish signal.
The yen has strengthened as U.S. interest rates have fallen since the FOMC minutes were released. The fact that the Japanese government downgraded its assessment of the economy for the first time in ten months is not a key consideration. There is understood to be greater scope for U.S. rates to fall than Japanese rates.
For a few days the dollar had traded above JPY79, but now seems to be back in the old range that has dominated the price action for the past month and that is with a JPY78-handle. We do not expect Bernanke to reveal his hand, as he did in 2010. Under such a scenario, we see the yen as vulnerable. However, we also recognize the contradictory influence from a decline in equities that may also result from disappointment with the Fed chief.
The Australian dollar fell to 5-week lows earlier today near $1.0345. While this violated the support we noted near $1.0370 on an intraday basis, it may still manage to close above there. Like sterling, the potential reversal we identified in the Aussie appears to have run its course. There is potential on the rebound toward $1.0440-60. It may be helped by the potential reversal in the Shanghai Composite today, after falling to new 3-year lows earlier in the session.
The Canadian dollar is testing its multi-month high. We recognize we have been resisting the strength of the Canadian dollar recently. The domestic data appears to have come in worse than expected and with the U.S. at the very least to push out its first hike, threats of a Canadian rate hike should not be taken so seriously. Yet, the Canadian dollar still offers a higher yielding alternative to the U.S. dollar market (and a seemingly stronger financial system) and is still a play on North America. Many see the loonie as a petro-currency. We note that the 60-day rolling correlation (on percent change) is near 0.76, just below the record (since at least 1993) recorded in late July near 0.80. However, the 30-day correlation has weakened considerably. After peaking near 0.87 in late July, it has broken below 0.60 today. The next level of support for the greenback is found near CAD0.9800.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.