It's well known that one man's happiness is another man's misfortune. This may seem strange in a column devoted to currencies, but they are no exception to the rule. The US dollar has just paid the price. The Federal Reserve's announcement at the beginning of the month of a status quo, coupled with a more dovish attitude on the part of its members, had already seriously damaged one of the pillars of the rally. The publication of the consumer price index buried the dollar's bullish hopes, and it took advantage of the situation to break through its 104.65 support level. At the same time, the euro broke through its equivalent resistance at 1.0760, confirming the dollar's weakness. If the saloon-gate structure is a good guide, we can anticipate downside potential of around 5.5%, with a target around 98.98/74. First resistance is at 105.90, while the key zone remains at 107.80/10.
What happens next?
In this scenario, it's important to understand that your dollar-denominated investments will mechanically suffer. Similarly, if you have invested cash in dollars to take advantage of the more favorable interest rate differential, it is to be feared that this marginal gain will be entirely wiped out by the exchange rate effect. At the same time, the dollar's decline is beginning to have an impact on other currencies. Over a sliding month, the dollar's momentum is particularly weakening against Scandinavian currencies (NOK and SEK) and South American currencies. We had focused on the MXN, which resumed its uptrend, closely followed by the BRL. The USDSEK finally failed to break above 11.18 and has just broken its support at 10.87, validating a double-top bearish reversal pattern with potential for 10.40 and even 10.20 on extension. The USDNOK followed suit, breaking 11.02 with 10.6787/10.5747 in its sights.
Even USDJPY is beginning to show signs of running out of steam. We'll be keeping a close eye on 149.10 to sell off our long positions and attempt a trend reversal with 144.67 as our target. As for commodity currencies, only a breakout above 0.6060/00 on the kiwi will enable us to reach 0.6190. In parallel, we'll be keeping an eye on resistance at 0.6550 on the aussie to open up at 0.6700.