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Dollar Matches Longest Climb Since November 2016, Is it a Trend?

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Talking Points:

  • A 7 consecutive trading day advance for the DXY matches the index’s longest charge in over 2 years
  • Like most currencies and asset classes, the Dollar still struggles with commitment
  • See the 1Q 2019 fundamental and technical forecast for the Dollar updated on our trading guides page

Looking for a fundamental perspective on USD? Check out the Weekly USD Fundamental Forecast.

Technical Forecast for US Dollar: Neutral

If we were to judge the appeal of a currency from its consistency alone, the Dollar’s charge through this past Friday would mark it as one of the most bullish current moves that we’ve seen from the broader financial market. As of Friday’s close, the Greenback (via the DXY Dollar Index) climbed seven consecutive trading days. That matches similar stretches through October 2018 and December 2017. We haven’t seen a climb longer than this since all the way back in November 2016. That is statistically impressive, but it is not singularly inspiring for subsequent trade developments moving into next week. The trough-to-peak scale of the move was only 1.58 percent – smaller than the 2.3 percent run back in October. That means what momentum we have seen thus far will not overcome its own gravity. And, as far as technical potential goes, all of the climb to this point has not brought us to any critical levels that could set the stage for another strong, sudden acceleration nor for a large swing reversal. There is a 61.8% Fibonacci retracement of the December 14th to January 10th range around 96.70. The more significant resistance would be the convergence of a much larger Fib stake and double top 18-month high at 97.75. Generally speaking, the Dollar is still locked in the middle of its range. That may cater to those that favor range trading, but it will frustrate others who are patiently awaiting larger moves.

Chart DXY Dollar Index with 50-Day and 200-Day Moving Average (Daily)

DXY

The contrast between the 7-day run thus far to the broader range that we continue to traverse highlights that limited ability of the market to mark key breakouts – much less the establishment of a more serious trend. There is a very gradual bullish bias behind the DXY Index over the past 9 months, but the persistent short-term swings within this plodding advance make for difficult trade for many who prefer the likes of EURUSD. A silver lining, however, is that these measured moves will not continue for much longer. As we discussed over previous weeks, the historical range for this currency is hitting low levels comparable to the extremes seen during the Summer of 2014. Below, the 20-day average true range (ATR) as a measure of the current spot rate is signally a volatility wind up. These readings are extreme, and extremes do not last. They inevitably normalize. One of the very overt threats to a quiet forecast is the abundance of fundamental risks plaguing the markets. From risk trends and Fed policy speculation to trade wars and policy officials’ interest in the exchange rate, there are numerous lines that can be cut to trigger a significant move – and, unfortunately, with little warning.

Chart DXY Dollar Index with 20-Day ATR/Price Ratio (Daily)

DXY

It is worth keeping track of key fundamental themes stirring the Dollar as we await a clear commitment to direction. Don’t worry, you don’t need to interpret headlines and follow the ebb and flow of trade negotiations. The charts can suffice as an important update on what is driving the currency. There are two complementary market measures that are worth following over the coming days and weeks. Monetary policy is a key though convoluted influence for the Greenback. The USD is presently the highest yielding major currency, but markets move as much on forecasts as they do present returns. Therefore, the implied yield derived from the year-end (December 2019) Fed Funds futures contract can give good guidance on this theme. A related consideration is how carry appeal compares to the currency’s renowned safe haven status. The more intense the risk aversion or risk appetite, the more explicit the juxtaposed roles will be for the Dollar. Therefore, the tempo on a sentiment benchmark like the S&P 500 will offer a critical benchmark for direction and tempo.

Chart DXY Dollar Index Overlaid with Fed Funds Implied Rate and S&P 500 (Daily)

DXY

Between risk trends and monetary policy, there is systemic reach that stretches far beyond an impact for the US currency. Monetary policy for example has seen a clear shift to the dovish end of the scale these past few months with the European Central Bank (ECB), Bank of Japan (BOJ) and Bank of England (BOE) have all made clear their concern for the economic and financial future. Add to that unique troubles like Brexit uncertainties and persistent on-set deflation and the flight to liquidity leaves only one serious alternative: the Dollar. Yet, the Fed is showing dovish proclivities and is the source of numerous risks of its own (trade wars, economic drudgery owing to political in-fighting); so where does capital move when the four most liquid currencies are all under pressure? Recent history shows there is still a preference for gold. Therefore, when evaluating the DXY or trade-weighted measures of the Dollar, it is further worth checking against the performance of Gold – both in Dollar terms as well as against the other majors (below is gold priced in an index of Dollar, Euro, Pound and Yen).

Chart of Equally-Weighted Gold Index and 50-Day Moving Average (Daily)

Gold

Looking to positioning, retail traders are showing a greater propensity for range trading given recent conditions. The IG client-based sentiment data on DailyFX shows significant swings in net positioning behind EURUSD as the pair has vacillated between 1.1500 and 1.1275. The longer these levels hold, the more comfortable the rank grows about the certainty of a reversal. That breeds a complacency that is familiar from this market group. Meanwhile, the larger speculative traders registered by the CFTC’s Commitment of Traders (COT) report is starting to release backdated figures that were halted during the partial US government shutdown. The data is a month behind with weekly updates due on Tuesday and Friday every week until the data is caught up. For now, the net speculative reading from this report – which is more steadfast and ultimately a better reading of larger trends – is still showing the consolidation at two-year high net-long exposure following the surge over the previous 9 months.

Chart of Net Speculative Positioning in Dollar Futures Positions from CFTC Report (Weekly)

DXY, COT

Other Weekly Technical Forecast:

Australian Dollar Forecast – Australian Dollar Strength Falls Apart, Can AUD/CAD Breakout Last?

Oil Forecast – Bullish Backdrop Remains Despite Weekly Drop

British Pound Forecast – GBP Down But Not Out



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Forex

Traders Net-Short Are 63.3% Higher from Last Week

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US500,SP500

TRADERS REMAIN NET-SHORT

US 500: Retail trader data shows 24.6% of traders are net-long with the ratio of traders short to long at 3.07 to 1. In fact, traders have remained net-short since Jan 07 when US 500 traded near 2473.53; price has moved 11.9% higher since then. The number of traders net-long is 1.7% higher than yesterday and 1.6% lower from last week, while the number of traders net-short is 5.2% higher than yesterday and 63.3% higher from last week.

For more in-depth analysis, check out the Q1 2019 Forecast for Equities

S&P 500 SUGGESTS STRONG BULLISH BIAS

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests US 500 prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger US 500-bullish contrarian trading bias.

— Written by Nancy Pakbaz, CFA, DailyFX Research

Follow Nancy on Twitter @NancyPakbazFX



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On to the Next Big Levels of Resistance

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S&P 500/Dow Jones/Nasdaq 100 Technical Highlights:

  • S&P 500 nearing 2800-area, several swing-highs from last year
  • Dow Jones 26k-ish stands between it and record highs
  • Nasdaq 100 trading around resistance already

Check out the forecasts for Global Stock Indices and other markets on the Trading Guides page.

S&P 500 nearing 2800-area, several swing-highs from last year

The S&P 500 is continuing to show impressive strength since its v-bottom began the day after Christmas, with it having a few points along the way where it could have been stopped in its tracks. But it wasn’t, and this has levels prior to the December swoon in view. The area surrounding 2800 is a big one.

From 2800 up to 2817 there were three peaks created from failed rallies, a logical area, with the rally having come this far, to look for stocks to weaken from. Watching price action will be key, as always, but especially around the levels just ahead.

While resistance looks likely to get tested soon, the upward channel structure over the past month will keep stocks pointed higher for as long as it holds. If the S&P is rejected off resistance, to further bolster the notion of a sizable retracement we’ll need to see the underside parallel undermined.

For now, the top-side must be respected, but the time for material weakness may be nearing…

Stocks are rallying, but will it last in the long-term? Find out where our analysts see stocks headed in the Global Equities Forecast.

S&P 500 Daily Chart (2800/817 big spot)

S&P 500 daily chart, 2800/817 big spot

Dow Jones 26k-ish stands between it and record highs

The Dow is nearing the 26k-area, a spot which is basically the equivalent of what 2800 is to the S&P 500. The zone runs up to near 26300. The focus is primarily on the S&P right now as it is the broader index, but depending on how price action plays out, the Dow may be the better index to short at some point if it shows relative weakness to the broader market.

Dow Daily Chart (26k-ish stands in the way)

Dow daily chart, 26k-ish stands in the way

Nasdaq 100 trading around resistance already

The Nasdaq 100 continues to lag behind, which is something to continue monitor given it was the bull-market leader with its leading group of stocks – FAANG – dominating price action and sentiment. The NDX is trading around the 200-day and near late-year swing highs equivalent to the ones discussed with regard to the S&P 500 and Dow. So far, relative weakness is making the 100 the preferred fade if the S&P finds material selling off resistance surrounding 2800/17.

Nasdaq 100 Daily Chart (trading around resistance)

Nasdaq 100 daily chart, trading around resistance

To learn more about U.S. indices, check out “The Difference between Dow, Nasdaq, and S&P 500: Major Facts & Opportunities.” You can join me every Wednesday at 10 GMT for live analysis on equity indices and commodities, and for the remaining roster of live events, check out the webinar calendar.

Tools for Forex & CFD Traders

Whether you are a beginning or experienced trader, DailyFX has several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

—Written by Paul Robinson, Market Analyst

You can follow Paul on Twitter at @PaulRobinsonFX



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Aussie Dollar Falls on RBA Minutes, US-China Trade Talks Eyed

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TALKING POINTS – AUSSIE DOLLAR, RBA MINUTES, ZEW, TRADE WARS, CHINA

  • Aussie Dollar, commodity bloc FX down on downbeat RBA meeting minutes
  • Germany’s ZEW survey may compound worries about slowing global growth
  • Trade wars in focus on US-China negotiations, fears of US auto tariff hike

The sentiment-linked Australian, Canadian and New Zealand Dollars weakened in otherwise quiet Asia Pacific trade. The move appeared to be inspired by an ominous tone in minutes from February’s RBA policy meeting. Meanwhile, the US Dollar corrected gently higher.

RBA officials cited “significant uncertainties”, noting that trade tensions and cooling domestic demand have increased negative knock-on risks from China. They added that consumption may fall if domestic house prices fall much further. They suffered the worst drop since 1983 in the three months through January.

TRADE WAR DEVELOPMENTS, GERMAN ZEW DATA MENACE MARKETS

Looking ahead, Germany’s ZEW survey of analyst sentiment may compound the downbeat mood, especially if it echoes the disappointing trend in regional data outcomes since September. A small improvement in the forward-looking Expectations index is nevertheless expected to keep it within a hair of six-year lows.

The tone of US-China trade negotiations may also be formative as a delegation from Beijing arrives in the US for continued talks. Both sides painted a rosy picture earlier in the week, but the Trump administration may be preparing a spoiler as the President ponders raising auto import tariffs.

What are we trading? See the DailyFX team’s top trade ideas for 2019 and find out!

ASIA PACIFIC TRADING SESSION

Asia Pacific Trade Economic Calendar

EUROPEAN TRADING SESSION

Europe Trade Economic Calendar

** All times listed in GMT. See the full economic calendar here.

FX TRADING RESOURCES

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter



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