Anyone doubting the legitimacy of the Dollar rally has probably been silenced for now, at least in the short term. The USD has rallied against all the G-7 countries in quite a convincing fashion and is now facing some critical levels with several of them. Take in note the following statistics around this recent USD surge:
-Barring a David Copperfield magic trick, the EUR/USD is about to complete its first 4 week decline in over a year, currently down about 675 pips from the supposedly ‘protected’ 1.60 handle
-The GBP/USD has declined approximately 700 pips in that same 4 weeks and like its little brother (EUR/USD) is closing near the lows
-The AUD/USD is about to post its 2nd largest 4 week drop in the last 3 years. The largest happened last summer during the unique Credit Crunch, which sold off all high-yielding pairs
-Out of the last 19 days, the AUD/USD has sold off 14 of them
-The USD/JPY has finally taken out the garrison at 108.50/60 (currently at 109.60) and has not seen these levels since mid Jan. 2008
-The USD/CAD is at its highest levels of 08′ and has not been at the current levels (1.0560) since Sept. of last year.
Need I go on? The defense rests its case your honor.
This USD rally is for real in every aspect, however, the toughest challenge and legitimacy of this rally is right around the corner.
In Feb. 2008 the EUR/USD went on a Mount Everest trek for a 1550 pip run to eventually challenge the all important 1.60 handle. We received several reports and heard many rumors from some large European banks that the 1.60 level was going to be ‘protected’. Whether this was rumor or fact, it matters not, there has been no daily close above 1.60 for the EUR/USD, and both attempts have met a 6 and a half cent decline.
Now, the pair has created a new 5 month low with the spot price clocking in at 1.5225. With the 1.5286/50%fib level being breached, we expect there would only be one more stopping point for this pair that being the 50% retracement of the mammoth 1550 pip ascent at 1.5223. If that goes and we have a daily close below, we are likely headed back to the 1.50 handle.
Any break of this fib could create a price cascade and send the bulls to the exits. Daily momentum is not convincing for this pair, and our Bollinger Pocket (figure 1) shows the pair still wedged in between the 1 and 2.5 standard deviation, where its been declining in for the last 8 days. As long as the pair stays in this pocket, the decline will continue and the ECB staying neutral was no favor to the bulls for holding their 1.53-1.60 territory.
Two other pairs coming up against crucial levels are the GBP/USD and AUD/USD. The GBP is currently sitting at the yearly lows (1.9322) and a daily close below 1.9300 could send this pair back to the land of 1.9000. Every test of the 1.9325/1/94 region has produced nothing less than a 350-400 pip rally but both intraday momentum and daily momentum are not in favor of a bounce. Only the typical end of the week paring could give this some relief.
The AUD/USD has also just broken the all important .9000 handle and has activated an unusual 5 intraday Ichimoku Strong Sell signals (1hr chart) suggesting the downtrend has no intentions of abating. The pair just broke the 61.8 fib (.9027) of the year low at .8511 to the year high .9849 with really only the 78.6% fib at .8860 standing in its way of a full retracement back to .8500. Daily momentum has been merciless on this pair and is doing everything it can to not find the bottom of the chart and jump off the screen. In other words, keep selling the AUDUSD until the momentum bounces significantly along with the Upper 2.5 STD Bollinger Band turning over suggesting the end of the move.
Chris Capre is the Founder of Second Skies LLC which specializes in Trading Systems, Private Mentoring and Advisory services. He has worked for one of the largest retail brokers in the FX market (FXCM) and is now the Fund Manager for White Knight Investments (www.whiteknightfxi.com/index.html). For more information about his services or his company, visit www.2ndskies.com.