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Currency Outlook for Q1 2011

 2010 saw the US Dollar rally on a broad scale throughout the first half of the year followed by a subsequent reversal eliminating most, if not all of the previous gains.  Higher time period support and resistance zones remained indispensable in identifying these long term inflection points. 

The basket of currency pairs we focus on (table to the right) can be divided behaviorally into two distinct groups.  The first group includes the EUR, GBP, and CHF which experienced significant weakness versus the Greenback during the first half of 2010 followed by a modest recovery into year-end.  The second group encompassing the AUD, CAD, and JPY began the year just as it ended, with strength.

Confirmed breaks of Monthly zones will remain critical to determining whether the USD will rally into the beginning of 2011 or resume the slide seen throughout the second half of 2010.

Please review the individual analysis of the currency crosses and accompanying monthly charts for additional information.  For ongoing updates to assist in the management of your positions, please view the Commentaries available on the AQA website as well as the Currency Zones Probability Report which is released each day.


DXY Index - Last Close 81.02

Time Period Momentum
Daily 
Weekly 
Monthly
 Quarterly
  Yearly
Bullish 
Bullish
Neutral
  Bearish  
Neutral

The DXY Index rallied from 77.91 in January to a yearly high of 88.71 in June, just through 1st Yearly Resistance.  The second half of the year was inverse to the first, with the DXY Index declining, eventually gaining traction in 1st Quarterly Support for Q4.

The DXY Index is currently testing a critical cluster of higher time period resistance containing 1st Monthly and 1st Quarterly zones.  Breaks of this cluster will open the door for further USD strength in the 1st Quarter. 

Maintain this outlook until the cross is able to close through 1st Weekly Support, thus ending bullish momentum.

Key Zones to Watch
1st Monthly Resistance | 80.72/81.36
                     61% Hold
1st Quarterly Resistance | 81.39/82.16

Breaks will Signal Reversal
1st Weekly Support |80.13/80.34
                  36% Meet / 65% Hold
 





EUR/USD - Last Close 1.2929

Time Period Momentum
Daily
Weekly 
Monthly
  Quarterly
Yearly
Bearish
Bearish
Neutral
Neutral
Neutral

The EUR/USD entered 2010 at 1.4312 with a nascent long term bear trend that did not let up until the cross traded through 1st Yearly Support whereupon the cross bounce modestly, still closing the year lower.

The cross is now challenging key 1st Monthly Support, which if broken, will reignite bearish momentum and expose further downside to 1st Quarterly Support.

Maintain this outlook until the cross is able to close through 1st Weekly Resistance.

Key Zones Under Pressure
1st Monthly Support | 1.2923/1.3052
                     59% Hold
1st Quarterly Support | 1.2655/1.2792

Break will Signal Reversal
1st Weekly Resistance | 1.3145/1.3205
                  40% Meet / 50% Hold 




GBP/USD - Last Close: 1.5554

Time Period Momentum
Daily 
Weekly 
Monthly 
Quarterly
 Yearly
Neutral
Neutral
Bearish
Neutral
Neutral

The GBP/USD, like the EUR and CHF sold off significantly during the first half of 2010, nearly testing 1st Yearly Support. The cross managed a modest bounce, but has been mainly treading water since the onset of Q4 2010.
 
1st Monthly Support and Resistance zones will be critical in determining whether recent bearish monthly momentum will persist, leading to further weakening into 2011. Breaks to the upside will signal a resurgence in GBP strength.

Key Zones to Watch
1st Monthly Resistance | 1.5865/1.5928
                    30% Meet / 86% Hold
--------------------------------------------------
1st Monthly Support | 1.5269/1.5345
                   48% Meet / 55% Hold 



USD/JPY - Last Close: 83.02

Time Period Momentum
Daily
Weekly 
Monthly 
Quarterly
 Yearly
Bullish 
 Neutral
 Neutral
Bearish
Bearish

The USD/JPY traded sideway throughout the first half of 2010, with momentum eventually turning bearish in May where long term momentum has remained ever since.

The cross is currently challenging a key higher time period resistance cluster containing 1st Monthly and 1st Quarterly Resistance, which must hold for long term bearish momentum to continue. 

Breaks of 1st Weekly Support will indicate a forming reaction and the persistence of neutral monthly momentum.

Key Zones to Watch
1st Monthly Resistance | 83.32/83.67
                       70% Hold
1st Quarterly Resistance | 83.76/84.57
                      Held for 14 quarters

Breaks will Signal Reversal
1st Weekly Support | 81.41/81.74
                    40% Meet /50% Hold




AUD/USD - Last Close 0.9957

Time Period Momentum
Daily
Weekly 
 Monthly
  Quarterly 
Yearly
Bearish 
 Neutral
 Bullish
Bullish
Bullish

The AUD/USD was one of the strongest currency pairs throughout 2010, rallying significantly from a low of 0.8067 in May to 1.0229 by year end. 

The past quarter placed a ceiling on Aussie strength defined by a massive Monthly / Quarterly / Yearly Resistance Overlap, which eventually broke in the waning days of 2010.

However, the cross has been on the decline since the onset of 2011 and is rapidly approaching the 1st Monthly / 1st Quarterly Support Overlap, which will provide the first significant test to long term bullish momentum.

Maintain this outlook until the cross is able to close through 1st Weekly Resistance.

 
Key Zones to Watch
1st Monthly Support | 0.9792/0.9855
                     52% Meet / 63% Hold
1st Quarterly Support | 0.9658/0.9825

Breaks will Signal Reversal
1st Weekly Resistance | 1.0049/1.0080
                   27% Meet / 64% Hold 




USD/CAD - Last Close: 0.9921

Time Period Momentum
Daily 
  Weekly 
 Monthly 
 Quarterly 
Yearly
Bearish
 Bearish
Bearish
Bearish
 Bearish

The USD/CAD traded the range between parity and 1.10 throughout most of the past year, with the cross maintaining firm pressure on 1st Quarterly Support throughout the past number of months. 

Further bearish momentum will remain focused on 1st Monthly Support zones should the cross continue to push through 1.0000. 

Maintain this outlook until the cross is able to close through 1st Weekly Resistance, thus ending bearish momentum.

Key Zones to Watch
1st Monthly Resistance | 1.0135/1.0188
                22% Meet / 65% Hold
-------------------------------------------------
1st Monthly Support | 0.9770/0.9822
               54% Meet / 70% Hold 




USD/CHF - Last Close: 0.9664

Time Period Momentum
Daily
 Weekly 
 Monthly 
 Quarterly
Yearly
Bullish 
 Neutral
 Bearish
Bearish
 Bearish


The cross rallied throughout the first half of 2010 and has been locked in a bearish trend ever since, culminating in a yearly close through 1st Monthly, 1st Quarterly, and 1st Yearly Support.

Bearish momentum is now being put to the test as the cross pushes through 1st Monthly Resistance and approaches the 2nd Monthly / 1st Quarterly Resistance Overlap.

Maintain this focus until the cross is able to close through 1st Weekly Support.

Key Zones to Watch
1st Monthly Resistance | 0.9556/0.9612
                     Broken / 38% Hold
2nd Monthly Resistance | 0.9767/0.9840
                    47% Meet / 90% Hold
1st Quarterly Resistance | 0.9806/0.9896
                    Held for 9 quarters

Breaks will Signal Reversal
1st Weekly Support | 0.9514/0.9553
                  38% Meet / 67% Hold 





Sentiment Throughout 2010



The sentiment of the individual currency futures displayed above closely mirrored the actual pricing behavior witnessed throughout 2010, with overbought readings (>70) seen in the DXY Index throughout the first half of 2010 followed by severe oversold readings (<30) in the latter half. The inverse was generally true of the remaining five currency futures charted above.
When taken on their own merit, severe overbought (>80) and oversold (<20) levels did not provide actionable inflection points as the DSI readings tend to hang for prolonged periods of time as seen above. However, inflection points became more identifiable when used in conjunction with AQA zones, which not only provide confirmation of meaningful shifts in momentum, but actionable levels in which to do so. 

The Daily Sentiment Indicator (NYSEARCA:DSI) is a short term contrary opinion indicator based on a survey taken by MBH Commodities. The survey assesses the Bullish or Bearish opinions of qualified non-professional traders in order to establish whether a market is overbought and oversold.

For more Information:
Katherine Dordick
Katherine.Dordick@arborresearch.com
847-756-3547
 
 


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.