Daily Client Note
Currency and Dollar Index Review
USD Holds Steady
The last 4-hour chart dollar index (DXY) (73.70) signals have been unable to follow through and break the ranges set in July and August. DXY is trading below the 50, 100, and 200-day SMA around 75.00, which is a price area has created fourteen mid-term buy and sell signals in the last three months that have failed to break either way and easily hold.
The 75.00 area was pivotal areas for the dollar, and equity indices, in 2009 and 2010, and will undoubtedly be important again in August. Global debt valuations will pull equity and currency reserve valuations around each day. The fundamental outlook on risk and debt will change as each trading session develops and will determine the direction of USD trade. Traders will see volatile intra-day price action as each global region opens and closes.
Major currencies have been in a three-month sideways crawl against the USD that will now see dollar buying if equities drop the S&P 500 below 1150. Credit markets are signaling danger, with SovX (Sovereign Credit Default Swaps) now extremely volatile, and equity indices futures back to 1.5% intra-day moves, with 4% drops thrown in for good measure. Debt ceilings, credit risk, banking stress tests, and rating downgrades are a volatile mix.
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 @ 75.00, the 100-day SMA is at 75.10. 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 75% most days.
Dollar Index Technical Section:
DXY futures are trading in the price range initially set in Mar, Apr, May, and Jun 2011, between 76.90 and 73.50. The 4-hour charts offer a technical display that reflects the impact of manipulative quantitative easing (QE) programs on dollar index trade.
The 20, 50, and 100-day SMA price points around 75.00 were called out as areas that were likely to be tested technically and then remain in play through most of the summer. The lack of momentum, low participation, and very mixed sentiment reads are not allowing a clear technical picture to form, in-line with a mixed fundamental outlook.
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 73.50. Clients will be updated if either move looks sustainable, and have to accept that a 300 tick trading range is all that the dollar index is offering. Buying previous session lows and selling previous session highs is the near-term technical solution to the malaise.
Market mechanics are not revealing which direction will offer the path of least resistance, and August is unlikely to form a sustainable long or short trend without a huge increase in daily participation levels.
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