Dollar extends declines but down days could be numbered
Fawad Razaqzada September 8, 2017 7:13 AM
After yesterday's sharp declines, the US dollar fell further against her Asian counterparts and the slump continued in early European session with the GBP/USD surging north of 1.3150. The dollar fell most notably against the Japanese yen, which rallied across the board. Investors piled in on the yen due to its perceived safe haven appeal as they feared North Korea tensions may rise again at the weekend in the event of another missile launch. News that South Korea has detected xenon, possibly from North Korea nuclear test sent the USD/JPY below 107.50.
The US dollar has been out of favour throughout this year as investors continually had to price out the prospects of an aggressive rate hiking cycle from the Federal Reserve, owing to deteriorating US data and political turmoil in Washington as doubts rise over Trump administration’s ability to deliver stronger growth. The depreciation of the dollar helped to underpin a number of major currency pairs as well as gold, silver and other buck-denominated metals. US equities also benefitted from a weaker currency, while the stronger EUR/USD exchange rate helped to keep the gains for European shares in check.
Could dollar make a surprise comeback?
However with sentiment being so bearish on the dollar, I can't help but think we could see a nasty short squeeze rally in the coming days or weeks. Any sudden improvement in data could see investors pile back into the oversold dollar. But we are still waiting for a stimulus to arrive in order to trigger a dollar rally. Until we see that stimulus and a corresponding sharp rally in the dollar, or a major technical reversal pattern, we remain bearish on the greenback, but to a lesser degree because most of the negativity may be priced in by now. Indeed one could argue, the selling may be overdone.
USD/CHF on watch for potential dollar comeback
With that in mind, we are on the lookout for signs of a dollar comeback, especially against currencies where the central bank is still dovish. A good example is the Swiss franc with the Swiss National Bank still charging negative interest rates and threatening to loosen its monetary policy further if needed, not to mention its ongoing intervention in the FX markets. The USD/CHF therefore could be among the first dollar pairs to show potential strength when the dollar starts to comeback. On that note, the Swissy has again refused to hold below the 2016 low of 0.94445 after a brief dip below it earlier this morning. This could be a potential turning point as it clearly shows the sellers are unwilling to offer the pair below this level. So far however, we haven’t had a clear break in market structure to suggest the downtrend is over. Once we create a higher high then this would confirm a bullish reversal. For now though, we treat this as a mere short-covering bounce and will continue to watch short-term resistance levels closely as price could still head further lower. Specifically, a couple of the key short-term resistance levels to watch include 1.9495 and 1.9530. Any potential move above 0.9590 would be bullish in the short-term. On the downside, if the USD/CHF breaks and holds below 0.9445 then the Fibonacci extension levels at 0.9360 (127.2%) and 0.9245 (161.8%) would be the next bearish objectives.
Source: eSignal and FOREX.com.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.