Does dollar weakness suggest positioning ahead of the Fed?

Market Overview

The sharp and somewhat surprising sell-off on the dollar yesterday (on little fundamental news) may have come as traders look to position themselves ahead of the Fed next week. Could it be that traders are mindful of the pricing mistakes made in the run up to the ECB meeting last week and they are unwilling to price in too much again? On balance the dollar should strengthen ahead of a meeting where the Fed is expected to hike, but perhaps there is a concern that too hawkish a position is being taken as the Fed is still likely to be very gradual in its path of tightening. The strong anti-dollar move saw forex majors spiking higher. Incredibly, even a rate cut from the Reserve Bank of New Zealand overnight has done little to help the US dollar.

Forex trading shows there has been a slight retracement of yesterday’s dollar weakness this morning and it will be interesting if the move continues as the morning develops. The sharp moves on euro, sterling and the yen are all looking to unwind, however interestingly the commodity currencies are stronger today, with the Aussie leading the way after better than expected Australian employment data..

The movement of equities on Wall Street was in step with the sharp swings on the oil price yesterday. Oil has closed for a third day below the August low of $37.75 on WTI and this is acting as a barometer for equities which are again under pressure. Market volatility (the VIX Index) shot higher by 11% yesterday. The S&P 500 which had been around a percent higher in the early part of the session, saw the gains flipped lower and a close of -0.8%. This has drained any positivity out of the Asian session with the Nikkei closing 1.3% lower, whilst European equities are also again on the back foot.

Traders are looking at two central bank decisions today with the Swiss National Bank (0830GMT) and the Bank of England (1200GMT) both announcing. There is a possibility of an SNB rate cut, but after the ECB disappointed in its easing last week this may have taken the pressure off the SNB for now. The Bank of England is not expected to move on rates and the 8-1 vote in favour of keeping rates flat with no hike is expected to remain the same. US weekly jobless claims at 1330GMT are expected to remain at 269,000.

Chart of the Day – DAX Xetra

With the euro regaining strength the DAX is once more under pressure to the downside. Yesterday the index closed at its lowest level since the 23rd October (the day after Mario Draghi first muted a likely extension to the ECB monetary easing), whilst early moves continue to show weakness today. Technically, the outlook is deteriorating now with the RSI at a two month low, MACD lines accelerating in their correction and Stochastics also increasingly weak. The next key Fibonacci retracement for support comes in at the 50% retracement of the 8355/12,390 rally with support at 10,373 which is not the likely next consolidation area. The outlook continues to suggest that intraday rallies will be seen as a chance to sell. The daily chart shows there is price support between 10,380/10,510 which is likely to come under pressure today. The intraday hourly chart shows resistance in the band 10,700/10,750 initially with key resistance now the rebound high at 10,993.

DAX   10122015


Although I was anticipating the euro to continue to build on support, the incredible gains seen yesterday (as much through dollar weakness as anything else) have taken me by surprise. The move through the resistance at $1.0980 yesterday afternoon has pulled the pair towards a test of the bottom of the old pivot band $1.1050/$1.1100. The impressive feature of the chart is also the momentum indicators which are increasingly positive. The RSI confirmed the upside move, whilst the Stochastics have completed a bull kiss. This should ensure that the bulls remain in control now and I expect further pressure on the $1.1050 pivot (yesterday’s peak was $1.1040). The intraday hourly chart shows a consolidation overnight but with support now in the band $1.0950/$1.0980 this is where I would be looking for the next near term buy signal. The issue now is whether the bulls can overcome the key pivot band.

EURUSD   10122015


The dollar weakness made the biggest impact on Cable, with over 170 pips added to the daily close and a move that has significantly turned around the near term outlook. Although I had seen a slight improvement in sentiment, the magnitude of the turnaround came as something of a shock and I now need to be more neutral near term. However, for now I still only see this as a counter-trend move with the daily chart still showing the downtrend from the August high is intact (currently falling at $1.5265). The daily momentum indicators show the obvious improvement, but I am yet to be convinced that this move is sustainable without the bears pouncing once again. As I said previously, the resistance at $1.5335 is the key resistance to confirm the turnaround in the medium term outlook. The first test of the credentials of the bulls comes in the $1.5100/$1.5150 range which was previously resistance and is now supportive. A quick failure back below would not be positive.

GBPUSD   10122015


Aside from Cable, the surprise move due to the dollar weakness came on Dollar/Yen, a pair that had been seemingly building for a break higher. With a correction gradually falling away, the arrival of the US traders yesterday saw the dollar slammed and a sharp move into the safer haven Japanese yen. This smashed through a series of important support levels and resulted in a 200 pip daily range. Having lost the pivot at 122.70, the key near term support at 122.20 was treated almost as a mere footnote, but then also the old resistance turned support around 121.70 was breached too. The surprise is that this whole move has completed the formation of a top pattern below 122.20. Incredibly though the implied target of 150 pips to the downside (c. 120.70) has almost already been achieved. There has been an intraday recovery and it is always important to see how the next day’s price action performs after such a deeply negative candle. The hourly chart shows there has been an element of unwinding overnight but interestingly the old 121.70 area has started to become a basis of resistance once more. This could be a dead cat bounce in front of a retest of yesterday’s low at 121.05 as the rallies get sold into.

USDJPY   10122015


One of the moves yesterday that would have caused eyebrows to raise somewhat was on a day of such significant dollar weakness, the gold price was unable to make any sustain any serious headway and actually closed lower on the day. The candlestick formation has subsequently been a touch negative on the daily chart. Since the price spiked to $1088.70 last Friday, there has been a sense of consolidation. I am mindful that the big move on gold last week (which was a short covering rally) came arguably a day late and this is something to be a touch wary of today. However, taking gold in isolation I am still expecting this to be a short covering move which will struggle to sustain the gains, with yesterday’s trading adding to my conviction on this. The momentum indicators have unwound to renew selling potential and the resistance band $1077/$1098 is providing the overhead supply. The near term resistance is clearly with $1088.70 and I would be looking towards a test of the support at $1067.25 to be tested, with a breach initially re-opening $1057.75.

Gold   10122015


The bulls still seem unable to get a stable foothold in a recovery for WTI. This comes despite the first week of declining EIA oil inventories in 11 weeks which should help to be supportive of prices. The technical moves suggest the price is struggling to break back above the resistance at $39.00 which was the old November low. Looking at the daily candles though reflects uncertainty in the last couple of days of trading, with yesterday’s initial gains being sharply sold into. This comes with momentum still very negative on both daily and hourly charts and the rallies continue to be seen as a chance to sell. The hourly chart shows resistance in the band $38.20/$39.00. The expectation remains for further weakness back to test the $36.65 low from Tuesday, whilst WTI remains on course for the 2008/2009 lows of $32.40/$33.50.

WTI   10122015