U.S. Dollar Index - LONG
The weekly price chart below shows the U.S. Dollar Index printed another bullish candlestick last week after having earlier rejected the zone of support which I had identified between 11899 and 11833. The price is above the levels from 3 and 6 months ago, which shows that the long-term bullish trend in the greenback is still valid. However, the candlestick closed within the bottom half of its range after falling for two days, so the short-term momentum is against the USD right now. This suggests that trades in the USD look better on the long rather than short side right now, so the best strategy in the Forex market over the coming week will probably be to look for long trades in US dollar currency pairs but only once the short-term momentum turns from bearish to bullish.
NZD - LONG (Rate hikes, watching WEDNESDAY, OCTOBER 6 meeting)
Rate hike in November is possible depending on the data, but over the next 12-months, the market appears to be pricing nearly five quarter-point rate hikes.
AUD - NATURAL / SHORT
After the disappointing news of aussie economy, the currency seems to have a downfall.
EUR/USD - SHORT
The main reason for our forecast of a lower EUR/USD has been relative real rates and the expectation that the Fed will turn relatively more hawkish than the ECB. We see no reason to change that view currently. Far and away the main question over the coming week will be whether nonfarm payrolls will expand rapidly enough to meet the Fed’s conditional guidance to taper bond purchases ‘soon.’ They might, but the suite of available evidence leaves open the risk of disappointment.
The EUR/USD currency pair broke to a new 14-month low price, closing near the bottom of its weekly range, although Friday did produce an up day. The euro has the steadiest long-term weakness of any major currency. These are bearish signs. It is likely that the price will continue to move lower over the coming days, although the medium-term downside may be limited by the big psychological round number below at 1.1500, which is confluent with a long-term pivotal horizontal level at 1.1517 which may halt the drop. There is an attractive short-term short trading opportunity here.
The euro fell hard last week, as the bond yield differential between the United States and Germany finally got too wide. That being said, we are desperately trying to hang on to the 1.16 level, but with this type of impulsive candlestick it does make sense that we will continue going lower. I anticipate that fading rallies will continue to be the way the market moves more often than not, with perhaps the 1.17 level above being a bit of the ceiling in the short term. If we can break down below the 1.15 level, the bottom will more than likely fall out.
USD/JPY - SHORT
The US dollar has been on an absolute tear against the Japanese yen over the last couple of weeks, and as a result of exhaustion was likely to come back into the picture eventually. That is exactly what we have seen, but there is still plenty of buying interest underneath that will support this market. I think that the ¥111 level is a natural place for this market to close from the previous week, and I think that the “bottom” is closer to the ¥110 level. I like the idea of buying dips going forward.
For instance, while a case can be made that the JPY shouldn’t be a safe haven currency, it behaves as one. When S&P500 weakens, the pair historically tends to drop (above chart based on weekly data since January 2000).
For market participants pondering FX hedges against Q4 tail risks we would however consider USDJPY shorts (or other JPY longs). Sure, the likely trajectory for dollar liquidity over the next six months should be USD positive, but this is unlikely to matter for this pair if risk sentiment weakens. We also argued earlier this year that the enormous rise in US excess liquidity won’t crash the dollar, and there’s a case to be made that dollar swap lines, standing repo facilities, massive QE program elsewhere have changed or altered the relationship between the dollar and dollar liquidity.
USD/CAD - SHORT
The US dollar continues to bounce around between the 1.25 level and the 1.28 level against the Canadian dollar. The past week has told us that more likely than not we could see a little bit of a pullback, in what would be an anti-US dollar move. While we are seeing US dollar strength against other currencies, oil has been rising rather rapidly, and perhaps that might be one of the main drivers of where we go next. Nonetheless, I would look for value hunters near the 1.25 level even if we do break down significantly. Over the course of this next week, I fully anticipate that we will still be stuck in the same range.
NZD/USD - LONG
The New Zealand dollar fell most of last week against the US dollar, but as you can see, we have recovered quite nicely. The question now is whether or not the support will hold. If we were to turn around and break down below the 0.68 level, it is likely that this market will fall apart quite drastically. However, if we end up turning around and breaking above the 0.70 level, that could be a bit of a turnaround. It will be interesting to see how this plays out, because this market is almost like a microcosm of what we see everywhere else: lots of choppy behavior without any real clarity.
