A breather for the dollar

Another volatile week for the markets is coming to a close. There has been no shortage of notable events including another round of equity market volatility, the resignation of a number of British Prime Minister Teresa Mays cabinet members, not to mention another round of heavy falls for crude oil.

Some initial signs also that the latest resurgence in the U.S. dollar which commenced in late September may have run its course for now. This statement doesn’t amount to turning bearish the U.S. dollar because the longer-term arguments for owning the U.S. dollar which we have outlined previously remain just as strong. However, markets don’t move in straight lines and there is now some evidence that the U.S. dollar has begun a corrective pullback that could extend between 2 and 5 percent and for FX traders that’s a move worth trading for.

When looking for reasons behind a retracement in the U.S. dollar, the positive impact of last year’s tax cuts on U.S. growth is already starting to recede. While the jobs market remains undeniably strong, data elsewhere has been mixed. An example of this was yesterdays retail sales data and although the headline number was robust, the composition and downward revisions have resulted in U.S investment bank Morgan Stanley lowering their 4th Quarter GDP tracking estimate to 2.6% from 2.8%. Certainly, no shame when compared to growth elsewhere, however the highwater mark for U.S. growth now appears in the rear vision mirror.

Elsewhere, there is increased expectations of an easing in U.S.- China trade tensions ahead of the G20 meeting starting on November 30 after reports emerged earlier in the week that the U.S. and China had resumed trade talks. A Bloomberg article yesterday reported that Chinese officials have outlined a series of potential concessions to the U.S. and while the concessions fall short of what the U.S. would like, there is hope that an agreement can be reached and no doubt this is one of the factors helping the AUDUSD and NZDUSD hold onto recent gains.

From a technical analysis perspective, regular readers would know that I analyse markets through an Elliott Wave framework as well as a handful of other key technical analysis methods including candlestick patterns. Both Elliott Wave and candlestick analysis are highlighting some interesting possibilities in the U.S dollar.

As can be viewed on the chart below, a clear 5 wave Elliott Wave advance can be viewed in the U.S. Dollar Index (DXY) from the February 88.25 low to this weeks 97.69 high including a subdividing Wave 5. Also catching the eye is the “Tweezer Top” candlestick pattern that occurred on Tuesday and Wednesday of this week. We could also throw into the mix the bearish divergence as viewed on the RSI.

Put together a combination of macro and technical indicators that warns a correction in the U.S. dollar is in the offering. To take advantage of the low risk profile that an early and pre-emptive trade entry offers, I have already initiated small long positions in AUDUSD and EURUSD and shorted USDJPY. Should the DXY close the week below 97.00 and then continue lower again early next week, it would greatly increase the likelihood that a deeper correction has commenced.

Source Tradingview. The figures stated are as of the 16th of November 2018. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation