Dollar Eases Slightly – But For How Long?

• December 18, 2006
• Kathy Lien

• Euro Closed Below 20 Day SMA
• Japanese Yen Under 118
• British Pound Slips Below 1.9500
• Swiss Franc Faces Resistance
• Canadian Dollar Loses Momentum
• Australian Dollar Probes Trendline Support
• New Zealand Dollar at Standstill

EURUSD — The EURUSD has slipped below the 12/11 low of 1.3126, bringing forward the possibility that the pair is headed towards the 38.2% fibo of 1.2483-1.3367 at 1.3030. A steep potential supporting trendline, drawn off of the 10/24 and 11/27 lows, is at 1.3046 today. Bolstering the bearish case is the EURUSD close below the 20 day SMA for the first time since 10/25 on Friday. On the flip side, the pair could bottom out near 1.3052 — the decline from 1.3292 would equal the 1.3367-1.3126 decline at 1.3052 (a classic a-b-c correction). There is little confidence in direction at the current juncture due to the possibility of a bottom nearby and the break below 1.3126.

USDJPY — USDJPY has eased back from Friday’s high of 118.32 just after RSI dropped from overbought levels. Nevertheless, oscillators remain bullish as the inverse head and shoulders pattern discussed last week continues to take shape. “The pattern since the 12/5/2005 high at 121.38 has taken on the form of an inverse head and shoulders pattern. However, a rally through the neckline is required to complete the pattern. The neckline is drawn off of the 12/5/2005 and 10/13/2005 highs and is near 119.60 today (decreases about 2 pips per day).” The 23.6% fibo of 114.42 — 118.32 at 117.40 is initial support.

GBPUSD — Cable continues to ease back from the highs achieved in early December and remains in a triangle formation with price nearing the apex. The recent break below a short term (1 month) supporting trendline on Friday favors continues weakness and a test of the 12/11 low at 1.9464. The longer term turn signals remain valid — that is, RSI crossing below 70 and CCI crossing below 100. If 1.9464 is given, then support would come in at the 50% fibo of 1.8834-1.9847 at 1.9341. The upside pivot is the 12/13 high at 1.9727. A cautious bearish bias is warranted due to the break of the short term trendline.

 

USDCHF — The USDCHF has distanced itself from the 38.2% of 1.2537-1.1878 at 1.1878 and the pair is currently trading at resistance 38.2% fibo of 1.2768 — 1.1878 at 1.2218. The pair closed above the 20 day SMA last Thursday for the first time since 10/25 — indicating a medium term shift in trend. As we said on Friday, “Overbought RSI on the 240 minute chart combined with the 3 wave structure of the advance from 1.1878 may serve to limit gains but only a decline below 1.2097 instills confidence in a bearish scenario.”

 

USDCAD — The USDCAD rally has lost momentum at channel resistance at the current juncture. Daily oscillators near or at overbought levels along with divergent short term oscillators gives scope to weakness / consolidation. Initial support is at the 12/8 high at 1.1516 while the next major level of resistance is not until 1.1771.

 

AUDUSD — The AUDUSD scenario has not changed from Friday when we said, “The short term double top at .7921/29 along with bearish divergence (daily oscillators) give scope to further weakness in the Aussie. A decline below .7811 shifts focus to the 11/1 high at .7766. A push through .7929 negates implications from the bearish evidence and gives scope to the 2004 high at .8003. The bearish case is reinforced by the break below .7811 / supporting trendline drawn off of the 10/12, 11/14, and 12/14 lows as well as CCI declining through 0.”

 

NZDUSD — The Kiwi has clustered near the 61.8% of .7463-.5927 between .6814 and .6939 and faces immediate resistance at the 78.6% fibo at .6922. While RSI has declined from above 70 on the daily, the uptrend remains in place above the trendline drawn off of the 6/28 and 11/15 lows. That line is at .6726 today and increases about 4 pips per day. A short term trendline near .6850 keeps the short term bias bullish. A decline below this line shifts focus to the 12/6 low at .6814.

Kathy Lien is the Chief Currency Strategist at

Forex Capital Markets. Kathy is responsible for providing research and analysis
for DailyFX, including technical and fundamental research reports, market
commentaries and trading strategies. A seasoned FX analyst and trader, prior to
joining FXCM, Kathy was an Associate at JPMorgan Chase where she worked in Cross
Markets and Foreign Exchange Trading.