Dollar Correction May Be One More Leg Away From Completion

The US dollar had one of its best weeks in months. It rose against nearly all the world's currencies. Many participants see scope for additional gains ahead of the quarter-end, which is ostensibly to require dollar-buying as corporates and asset-managers adjust hedges and re-balance.  

After several months of dollar weakness, we see its recent strength has corrective in nature.   The question is, what move is being corrected.  It could be the entire move since the March lows, or it could be the move here in Q3.  We will be sensitive to both, especially where the retracements overlap.  The dollar's strong finish warns that it may still be too early to pick a top. In part, it is a question of positioning, with the currencies that had risen most recent hit the hardest, with some exceptions.  But with the elevated uncertainty about the US elections (and aftermath), downward revisions in Q3 GDP estimates, the correction will give an opportunity to sell the dollar again shortly.  The technical indicators suggest the correction is well advanced.     

Dollar Index:  New two-month highs a little above 94.60 were recorded before the weekend.  It is near the (50%) retracement of the Q3 decline, which is about 94.80.  The MACD and Slow Stochastic are stretched, but a move into the 95.50-96.00 area looks likely.  It houses the (61.8%) retracement of the Q3 move and the initial objective (38.2%) of the decline from the March highs.  A note of caution comes from the Bollinger Bands.  The Dollar Index has closed above the upper band for the past three consecutive sessions, which it has not done since the March peak.  

Euro:  The single currency fell for the second consecutive week, the first back-to-back loss in Q3.  The 1.7% decline was the largest in five months and made a marginal new low at the end of the week.  The momentum indicators are over-extended but could still allow one more push lower.  A break of $1.1600 would target a little below $1.15, which could exhaust the move.  The $1.1485 area corresponds to a (38.2%) retracement of the six-month rally and (61.8%) of the leg up that began in late June.   The euro finished the past four sessions below its lower Bollinger Band.  

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Read more by Marc on his site Marc to Market.

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