Daily Client Note
Currency and Dollar Index Review
USD/S&P Correlations Hold
The last dollar index (DXY) (74.60) 4-hour chart signal was generated on Jul 07 11 with a move above 75.50 that targeted 76.00 and 76.50 which completed its cycle in-line with S&P 500 trade moving lower to test support. DXY is trading at the 50 and 100-day SMA area at 75.00 which has created nine mid-term buy and sell signals in the last three months, matched by a similar number of S&P 500 trade signals that have failed to break either way and easily hold.
These were pivotal areas in 2009 and 2010, and will undoubtedly be important again in July as earnings season and global debt valuations pull equity and currency reserve valuations around each day. The fundamental outlook will change day-to-day which will determine the direction of USD trade. Traders will see technical reversal and tipping points dominate price action in the near-term, which will create volatile intra-day price action as each global region opens and closes.
Major currencies have been in a two-month sideways crawl against the USD that will now see dollar buying if equities drop lower in reaction to corporate business guidance reports that started in July. Credit markets are signaling danger, with SovX (Sovereign Credit Default Swaps) now extremely volatile, and S& Futures back to 1.5% intra-day moves.
Where-To For DXY:
• In a neutral near-term momentum cycle that is easily holding major support and failing at major resistance
• Upside targets will include 76.90 if S&P 500 trade closes a Weekly chart below 1295
• Expect downside tests of 74.90 support to hold steady if S&P 500 trade cannot break above 1325
• Low-volume ramps are hitting the equity and currency markets in 1-hour spasms which have not been able to generate sustainable mid-term moves
This review of technical sentiment is signaling to buy the dollar index on any downside tests of support. Detail of such moves will be emailed directly to clients in real-time.
Dollar Index Correlations:
Daily trading range on DXY is 68 ticks, which is building in strength and indicates institutional interest in generating a support base. The 50-day Simple Moving Average (NYSE:SMA) on DXY is @ 75.20, the 100-day SMA is at 75.40. DXY price action has a 36-month 75% inverse correlation to crude oil and SPY moves, and an 80% inverse correlation to euro (Eur/Usd) currency moves. The USD/S&P near-term inverse correlation is holding around 90%.
The second quarter of 2011 generated 77 forex trade signals issued to clients, 51 of which completed and covered over 750 pips of net movement at Target 1 areas, and 600 pips of net movement at Target 2 areas. The misses came on days that instant volatility hit the global markets in reaction to breaking news headlines. Most signals have been generated from 1-hour chart algorithms.
Trade Desk Outlook:
At this stage it would seem that dollar valuations hinge on where S&P 500 markets decide to settle. Short-equities equate to long-dollars, and vice versa. The dollar is not being bought from a desire to be long the US economic growth story; it is being bought as an automated hedge against falling equity valuations.
Clients will be notified via real-time Trade Signals and Market Alerts when price action breaks and holds which sets up the next dollar index move. Right now, the call is for a consolidation of USD trade above main support, which will break higher if S&P 500 futures reverse through 1295 support.
Dollar Index Technical Review:
• Trading at the 100-day SMA area at 75.50, which was a pivotal price point area in Apr, May, and Jun 2011
• The DXY/S&P inverse correlation is stronger on an intra-day basis when stocks are falling in value, which was seen again on the last S&P 500 ramp higher that saw minimal USD selling
• No mid-term long signals will form on DXY until a Weekly chart closes above 76.90. No mid-term short signals will form until a Weekly chart closes below 74.50
• Choppy and overlapping chart patterns are caught in a 4-month trading range with no clear technical signals
• Any sell signals will hit major support at 74.00
Global Forex Order Flows:
It is generally accepted that forex trade will follow, not lead, global market momentum. Price action in global trade at this point in time is very mixed, and favoring weakness in equity and commodity trade, which may increase dollar buying momentum.
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 Regions 10%.
Daily Client Note