I am looking at this morning’s price action as a blip across several markets. This will be a blip that gives an opportunity to trade in the prevailing direction of the market. That prevailing direction is one of continued dollar strength.
The Dollar Index has taken a breather today. After a strong run higher that began on Wednesday after the Fed put an end to QE3 (dubbed “QE Infinity”), the dollar has just begun to pull back slightly today. However, the moves we have seen today just look to be classic counter-trend moves. The Dollar Index has pulled back around 0.2% today and has room to pull a further half a percent towards the breakout support at 86.75. Moving further out, having now breached the old key reaction high at 86.75, the Dollar Index certainly has scope for a medium term move towards the next key resistance at 88.7 (which is another 1.8% higher from current levels).
However, this correction is likely to be a near term phenomena that ultimately gives another chance to buy the dollar. Equivalent levels I am looking for on the major pairs:
- I am ready to short EUR/USD on a sell signal around $1.2540, the outlook remains bearish and this move today certainly looks to be counter trend.
- A continued failure for Cable to rally through the $1.6000/$1.6050 resistance band should be viewed as a chance to sell.
- Dollar/Yen successfully forming support in the 112.50/113.00 near term support band could be another chance to buy.
- AUD/USD failing again around 0.8760 (although the Aussie unemployment data can often provide high volatility in the pair, so there is a caveat with Thursday’s data release).
- NZD/USD failing in the resistance band 0.7770/0.7800 is a chance to sell for further pressure on 0.7700.
At this time, gold is a difficult play. Although the recent dollar strength has put significant downside pressure on gold, there is the potential for some significant volatility in the coming weeks (least of all starting with Non-farm Payrolls on Friday). The recent sell-off has broken some key technical levels (most notably at $1180.70). Technically this should result in further weakness, with any rallies into the resistance band $1180/$1200 seen as a chance to sell. However, I feel this should be viewed as a very near term strategy as medium term gold positions should be treated with significant caution. The Swiss Gold Initiative referendum vote (on 30th November) could result in the Swiss National Bank needing to buy significant holdings in gold. This could mean that the price becomes increasingly more volatile as the month goes on, especially if the opinion polls begin to tighten (currently only around 44% intending to vote Yes).