Forex Flash: Is there a correction at hand? - BBH
FXstreet.com (Barcelona) - Marc Chandler, Global Head of Currency Strategy at Brown Brothers Harriman notes that the technical tone of the major foreign currencies deteriorated in recent days.
He feels that it appears to be a cascading effect, with favourite risk on currencies, such as the dollar-bloc, failing to participate in the move against the Greenback. The Swiss Franc took the dubious honour of being the weakest currency last week, losing 2.2% against the dollar.
Looking to Sterling, Chandler notes that it has been flirting with the up trend line drawn off last June's lows and rebounds looks increasingly half hearted before convincingly breaking down and trading below the 200 day MA for the first time in a couple of months. He notes that of major currencies, it was the Euro, which slipped 0.15% and the Mexican Peso, which declined 0.05% on the week, which held up the best.
Chandler asks, "The key technical question now is which set of currencies is generating the correct signal: The Euro and Peso, which suggest that the dollar's down trend is still intact, or the other currencies that appear to be signalling a dollar recovery is at hand?" He suspects that the `preponderance of technical factors favour the dollar recovery scenario .
He writes, "To be sure, it is not just that sterling and the Swiss franc are providing lead signals into what is going to happen to the Euro. The technical condition of the Euro itself looks vulnerable on two grounds. First, there is bearish divergence in the daily (14-bar) relative strength index. This means that the indicator did not confirm the strength of the price action. Second, the dominant short-term chart pattern is a potential double top, with the failure to move above the $1.34 area in the second half of the week. The neckline of the double top comes in near $1.3255. A convincing break is needed to confirm the pattern and project around to around $1.31."
Looking to the Mexican Peso, he adds that it made a new multi-month high last week, but failed to maintain the momentum. He feels that this seems to be a particularly crowded trade, with hedge funds, real money and speculators dominating the space. He adds, "The relative strength index is showing a dollar-bullish divergence. The MACDs and the slow stochastics appear poised to turn higher. A move above MXN12.70 would likely signal an upside correction that could lift the Greenback toward MXN12.90-MXN13.0. The surprisingly dovish central bank comments at the end of last week could be the proverbial drop of tea that overflows the cup.
Shifting focus to the Dollar Index, Chandler notes that while recognising that it is heavily weighted towards the Euro and currencies highly correlated with the Euro, it can generate insight into the Dollar's broader technical tone. He writes, "The Euro's strength against the dollar has been diluted in DXY by the weakness of the yen and to a less extent the Canadian dollar (and in recent days the Swiss franc). The price action looks constructive, but is not yet causing the bears much pain."
Overall, the technical indicators that Chandler uses are mixed, and with the Relative Strength Index turning higher, neutral MACD readings and fast stochastics have turned up, though the slow reading has not yet. He adds that the 5 day MA crossed below the 20, but given the pre-weekend recovery, may cross back to the upside even if there is some consolidation at the start of the week. Chandler finishes by writing, "To lend confirmation of a more positive technical outlook in general for the US dollar, DXY needs to move above the 80.30-60 area. On the other hand, a convincing break of 79.60-80 on the downside, would call it into question."
He feels that it appears to be a cascading effect, with favourite risk on currencies, such as the dollar-bloc, failing to participate in the move against the Greenback. The Swiss Franc took the dubious honour of being the weakest currency last week, losing 2.2% against the dollar.
Looking to Sterling, Chandler notes that it has been flirting with the up trend line drawn off last June's lows and rebounds looks increasingly half hearted before convincingly breaking down and trading below the 200 day MA for the first time in a couple of months. He notes that of major currencies, it was the Euro, which slipped 0.15% and the Mexican Peso, which declined 0.05% on the week, which held up the best.
Chandler asks, "The key technical question now is which set of currencies is generating the correct signal: The Euro and Peso, which suggest that the dollar's down trend is still intact, or the other currencies that appear to be signalling a dollar recovery is at hand?" He suspects that the `preponderance of technical factors favour the dollar recovery scenario .
He writes, "To be sure, it is not just that sterling and the Swiss franc are providing lead signals into what is going to happen to the Euro. The technical condition of the Euro itself looks vulnerable on two grounds. First, there is bearish divergence in the daily (14-bar) relative strength index. This means that the indicator did not confirm the strength of the price action. Second, the dominant short-term chart pattern is a potential double top, with the failure to move above the $1.34 area in the second half of the week. The neckline of the double top comes in near $1.3255. A convincing break is needed to confirm the pattern and project around to around $1.31."
Looking to the Mexican Peso, he adds that it made a new multi-month high last week, but failed to maintain the momentum. He feels that this seems to be a particularly crowded trade, with hedge funds, real money and speculators dominating the space. He adds, "The relative strength index is showing a dollar-bullish divergence. The MACDs and the slow stochastics appear poised to turn higher. A move above MXN12.70 would likely signal an upside correction that could lift the Greenback toward MXN12.90-MXN13.0. The surprisingly dovish central bank comments at the end of last week could be the proverbial drop of tea that overflows the cup.
Shifting focus to the Dollar Index, Chandler notes that while recognising that it is heavily weighted towards the Euro and currencies highly correlated with the Euro, it can generate insight into the Dollar's broader technical tone. He writes, "The Euro's strength against the dollar has been diluted in DXY by the weakness of the yen and to a less extent the Canadian dollar (and in recent days the Swiss franc). The price action looks constructive, but is not yet causing the bears much pain."
Overall, the technical indicators that Chandler uses are mixed, and with the Relative Strength Index turning higher, neutral MACD readings and fast stochastics have turned up, though the slow reading has not yet. He adds that the 5 day MA crossed below the 20, but given the pre-weekend recovery, may cross back to the upside even if there is some consolidation at the start of the week. Chandler finishes by writing, "To lend confirmation of a more positive technical outlook in general for the US dollar, DXY needs to move above the 80.30-60 area. On the other hand, a convincing break of 79.60-80 on the downside, would call it into question."
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