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Talking Points:
-US Dollar Technical Strategy: Favoring a Buy-the-Dip Environment
- Bullish Confirmation on Break of 12/17/15 High
-100-DMA at 12,040 Remains Key Support Moving Forward
What a week for the US Dollar. The outlook that the Federal Reserve pushed the US Dollar within a handful of ticks from the 2015 high. The US Dollar is set to end the week higher against all G10 currencies except the New Zealand Dollar, which is currently the strongest currency within the G10 on the week. The big surprise from the Federal Reserve on December 16th was not the rate hike, but rather the view that the Fed could hike four times in 2016. Should this happen, an increasingly large divergence between the United States and other economies would continue to emerge, which would likely push the US Dollar even higher. As we’ve seen in USDCAD, even if a currency looks to be “topping,” that “final” move can result in a strong move that wipes out traders fighting the trend.
For now, the clean support on the US Dollar remains the 100-DMA at 12,040. While tactical/ short-term traders may find opportunities selling the US Dollar above the 100-dma, the strength of the US Dollar along with stable yields and weakness elsewhere make the higher probability move higher. Conservative or patient traders who want confirmation of a move higher before jumping in the trade may want to wait for a break above the post-Fed higher near 12,204/6. 12,204/6 combines the closing high of the extreme day high for US Dollar in 2015 on November 6th and Wednesday’s Bull Run high. Traders that are more attracted to a good risk: reward may prefer to enter now with targets beyond the current 2016 high at 12,219, and a stop below the pre-Fed low of 12,040.
Supporting markets could continue to provide a base under the US Dollar. The easiest market to point to are US 2Yr. Yields, which broke above 1% for the first time since 2011 on the Fed’s announcement this week. However, given the larger pattern of a multi-year bullish falling wedge for yields, we could target a return to the start of the pattern near 1.40%. Given the strong divergence we’ve already seen from the spread of US short-term yields to other major countries, the strong dollar/ pain trade could well continue into 2016. Below, you can see price above multiple forms of support (Ichimoku, moving average, above the corrective channel), and add to that, we have a strong break on RSI(5). Should that carry through, we may see January, which is seasonally bullish the US Dollar, bring more pain to US Dollar shorts.
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