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Global Trade Desk- Near-term USD reversal followed by USD buying

Daily Client Note

Currency and Dollar Index Review

Near-term USD reversal followed by USD buying

News flows and economic announcements are slow at the start of this week, and movement is likely to come from technical reactions to recent trade, rather than breaking headlines. It may not be possible for the USD to rally hard and easily hold above 75.50 on the dollar index (DXY) (74.90), but it has to be noted that each time the index has threatened a break below 72.50 support the global market participants are quick to join the long-dollar trade.
Trade desk updates have called for consolidation at support above 72.50 on the dollar index in the mid-term, and to monitor resistance at 76.50 very closely. It was noted last week that it was the time to take a serious look at building near-term long-dollar positions. Equity trade moved S&P 500 (1272) valuations below 1275 on a weekly close, and the path of least resistance may now be for USD strength if the next test of S&P 500 resistance fails to hold.

The dollar index (74.70) is oversold in the mid-term. The 4-hour trends are flattening out, which sets up a buy-the-test-of-support play from the next downside move towards 74.00..

The potential for new trade signals to form on the USD today is mixed, as a technical overbought reversal which gives back some of the recent USD gains may follow through after two sessions of volatile USD appreciation. Any open long-USD positions should be closely monitored for take-profit signals, before the next leg of dollar buying is easily able to break higher and hold.

EUR/USD will be in the spotlight now as interest rate speculation challenges debt concerns in the Eur-zone. No developed economic region will be immune from a global slowdown if weak economic reports continue to hit the news wires, which will increase the demand for long-USD positions in the mid-term.

Global traded markets have recently sold equity indices, which as a consequence of the inverse historical relationship, should have seen USD buying. However, Usd trade is currently less well aligned to S&P 500 movement than the 36-month 75% read.

Exchange Traded Fund:
The exchange traded funds (ETF’s) that track dollar index momentum, UUP (dollar bullish fund) and UDN (dollar bearish fund), are still in a consolidation phase of trade that offers no indication or signal that either can break a range and easily hold. The real challenge for ETF traders is that the dollar index runs 24 hours a day, and by the time Wall Street opens a lot of momentum and energy has already been put in place ahead of the ETF then being able to move. UUP and UDN are not picking up the Asian and European dollar-based moves, and at this time offer a weak reflection of near-term USD movement.

Price Action:
Strong buying activity was seen at 74.00 on DXY trade in April and May. This potential swing point will be closely monitored now that it has been broken as resistance.. Market alerts will be sent to subscribers if there is a sustainable bounce off 74.50 support on Monday that highlights a USD buying opportunity. Previous price action at these dollar index levels have been choppy, overlapping, and very volatile, but have resulted in USD buying.

Main DXY support: 72.50 and 74.00. Main DXY resistance: 76.50 and 78.00.

Technical Correlations:
Daily trading range on DXY is 40 ticks, which is below the near-term reads and indicates low speculative interest. 50-day Simple Moving Average (NYSE:SMA) on DXY is @ 75.10. DXY price action has a 36-month 75% correlation to crude oil and SPY moves, and an 80% correlation to euro (Eur/Usd) currency moves.

Recent Signals:
There are mid-term trade signals forming after the recent burst of USD energy could not be transposed into a sustained break of dollar index support at 73.50. Clients will be notified via trade signals and market alerts when price action breaks and holds, and sets up mid-term signals. Right now, the call is for a quick reversal of USD buying, find support, and then break higher if equity indices sell S&P 500 futures trade below 1270.

It needs to be accepted that forex trade will follow, not lead, global market momentum. Price action in global trade at this point in time is very mixed, but favoring short-equity moves, consolidation and potential weakness in commodity trade, and potential buying of the dollar.

Global Forex Order Flows:
The Bank for International Settlement data below reveals that the forex market will remain contained in tight ranges from 10:00 ET until at least 20:00 ET most days, because of the weak order flows going through the US session. It also reveals why the European futures market open, from around 02:00 ET through until the Chicago reversal at 07:00 ET are the main times to expect sustainable moves. Europe dominates forex flows in the same way that the US dominates bond and equity flows.

U.K. and Euro-zone 53% (01:00 ET-11:00ET). Asia 21%. (18:00 ET-03:00 ET). U.S. 16% (07:00 ET-16:00ET). Other 10%.
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