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Sunday 11 March 2012

US Dollar Update

I wrote a post last weekend about GBPUSD, and mentioned at the end of that post, which you can see here, that while USD had not reached my ideal channel retracement target, it might nonetheless be starting to reverse back up to complete the giant IHS forming on it. Since then the declining resistance trendline I highlighted has broken up and retested, and USD is showing what looks likely to be either a double-bottom, if it breaks up here, or the left shoulder and head of a small IHS, if it reverses here. Here's the current setup, and I haven't marked in the possible small IHS forming due to space constraints on the chart:
So this is an interesting inflection point on USD, and looking at both EURUSD and GBPUSD we may have seen the rally high on both now. On the EURUSD 60min chart the current rising channel has broken down and EURUSD was testing the broken channel support trendline throughout Friday:
On the EURUSD bigger picture there's a sloping H&S on the daily chart that I have posted a few times over the last few months has had a retest that overshot somewhat, but the pattern is still perfectly valid and the target is in the 1.125 area:
I've mentioned a few times before that I like to use the GBPUSD chart as an inverse proxy for USD rather than EURUSD, and the reason for that is that GBPUSD has little in the way of commodities and very extensive QE, like the Eurozone, but currently has no sovereign debt solvency issues. The picture on GBPUSD is looking increasingly bearish with a decent technical double-top on strongly negative daily RSI divergence, and it is now testing the base/neckline of that double-top in the 1.565 area. On a break below I have a technical target in the 1.531 area, but the real target is trendline support and the large H&S neckline in the 1.534 area:
I was talking last week about QE in the Eurozone and in the UK and the likely consequence of the QE being a substantial rise for USD against both EURUSD and GBPUSD over the next year or so. The rally from January may now have finished, and that rise on USD may therefore have started. QE is in part about devaluation and just as USD fell hard during QE1 and QE2, the obvious consequence to EURUSD and GBPUSD now is that they fall hard just as USD did then.

What impact will this have on equity markets? Well the experience in QE1 and QE2 isn't encouraging for bears here. As USD fell equity markets in the US rallied hard, and markets in the Eurozone and the UK rallied hard too. There's a good argument that massive QE anywhere in the western world has a positive effect on equity markets, but that equity markets in the US should be a better play while the US Dollar rises. The effect on commodity prices should be more marked, though oil might well hold up due to well founded concerns about war in the Middle East.

On that last subject I read Netanyahu's speech to AIPAC a few days ago and it was difficult to argue with the logic of what he said in that speech. What I took away from reading it is that war between Israel and Iran is a lot more likely than most people are thinking, and that traders should bear that in mind. You can see the speech here and draw your own conclusions, but if that's right, then any moves down on oil may be short-lived as pre-war tensions rise.

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