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Friday 19 March 2010

Is USD starting a new wave up?

Possibly the most important question for market direction in the next few weeks is whether the USD is going to start a new wave up and when exactly that might happen.

Now the inverse correlation with equities isn't what it used to be, but while weakened it certainly isn't altogether dead as yet. During the first USD wave up in December equities stayed flat with a slight upward bias but during the second wave up in mid January to early February there was a very significant correction in equities.

During both periods of USD consolidation after those waves, equities rallied significantly, but there is every reason to expect that if another USD wave up gets going, then we will see at least see equities trading sideways over the likely three to four weeks that wave up would take.

It is difficult to get a reliable channel on USD that looks the same between the USD indices and the USD futures, and on my futures chart the bottom trendline of the channel was not touched, though we came within 0.20 of doing so. On the $USD index and UUP charts though it does look as though USD has now bottomed and turned back up.

The lower trendline of the rising lower channel trendline on the UUP weekly chart has been (thoroughly) tested and has held. I have put the SPX in the background of the chart to illustrate my point about equities during the last two USD waves up:

The picture looks similar on the $USD daily chart with the lower channel trendline tested and holding:

So what does this mean for the USD currency pairs? Well, on the XEU weekly chart EURUSD looks as though it has hit the top of the declining channel and started a new wave down, with a likely target in the 1.30 area:

I drew a fan on the GBPUSD weekly chart in December which is still looking very good. Cable broke fan support three weeks ago and has returned to retest the broken fanline. If it holds, and it has held so far, then the next target for it is at the bottom of the fan channel in the 1.40 area:

The Swiss Franc tends to track EURUSD fairly closely, but that relationship seems to have been breaking down lately for the obvious reasons. Like EURUSD though it is in a strong declining channel, but unlike it CHF hasn't yet hit the top of the declining channel. It may not of course, and if it starts a new wave down the obvious target is at the lower declining channel trendline at 91.

The Japanese Yen has risen with USD during the last two USD waves up, and there is every reason to think that it will do so again this time. JPYUSD is fairly close to very solid support in the 109.5 area and the obvious next target would be at 114.

Of the commodities currencies The Australian Dollar looks very vulnerable here. It recently broke down from a rising wedge targeting a very large retracement, but more immediately it has since been trading in a broadening descending wedge and is near the top trendline of that wedge, where there is very solid resistance at 92.5. A break downwards from here would target the lower trendline of that wedge in the 83.5 area:

The most bullish USD currency pair chart that I have looked at this morning though is definitely the Canadian Dollar. It is still in a strong rising channel and the obvious next target is the top of that channel at 104 and rising. It has just hit the middle of the channel though, and may retrace from there for a while in the event that USD has another wave up.

On balance it does look likely that USD has started a new wave up, and we've had strong confirmation of that this morning with a definite break of the recent EURUSD rising channel on the spot forex hourly chart:

If so, what does this mean for equities? It means that we are very likely to be starting a period of either consolidation or correction for the next few weeks. We would all probably be better off playing the forex opportunities here rather than shorting equities though, as the inverse correlation of equities with USD is obviously much weakened in recent months.

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