Tag Archive for: U.S. DOLLAR INDEX

In a downtrend the lower boundary of a trend channel represents the “negative” extreme and the upper boundary the “positive” extreme. Price is expected to rebound from the positive and negative extremes. A downtrend is likely to reverse when the upper boundary is broken on the upside. Likewise an uptrend is likely to reverse when the lower boundary is broken on the downside.

But what happens when the price doesn’t rebound from the lower or the upper boundary of the trend channel? Breaking down a negative extreme is usually a sign of an accelerated move in the direction of the breakdown.

This is the case with AUD/USD. Since 2011, Australian Dollar vs. U.S. Dollar has been in a downtrend. Cross rate rebounded from the lower boundary twice in 2013. With the latest sell-off AUD/USD breached the lower boundary, failing to rebound. Unless the cross rate recovers above 0.85 levels in the following weeks, latest breakdown will be the beginning of an accelerated move on the downside. In the short/medium-term and Australian dollar is weak against the U.S. dollar.

Dollar is gaining strength against major currencies. Recent breakout on the U.S. dollar index confirms this. Other than Euro and Japanese yen weakness we are also seeing depreciation in emerging market currencies. Combined weakening effect of the developed and emerging market currencies resulted in a sharp price movement on the U.S. dollar index. Latest breakout above 81.60 completed a “double bottom” chart pattern with a price target of 84-85 area for the coming weeks. Price should remain above 81.60 levels for the dollar strength to resume in the medium-term. 81.60 becomes the new support level.

Some exciting chart developments are taking place in the emerging market currencies. Peruvian Nuevo Sol; local currency of Peru is losing strength against the U.S. dollar. Latest chart development – ascending triangle on the weekly scale – is bullish for the dollar and suggests further depreciation of the Peruvian Nuevo Sol. Breakout above 2.82 levels will confirm the bearish case for PEN.

Another currency pair that is at the edge of a breakout is the Russian Ruble. Since the beginning of 2009 USD/RUB tested 36.50 for the third time. Breakout above 36.50 will be negative for the Russian currency. It is important to note that 36.50 is the historical high for the USD/RUB.

Multi-year low volatility reading on the U.S. dollar index suggests strong directional movement in the following weeks/months. U.S. dollar index tested the strong support level for the 5th time over the past two years and a breakdown below this support level at 79.5 could push the U.S. dollar index towards 75 levels. Unless we see another rebound from the strong support in the following weeks, we will favor a bearish scenario for the U.S. dollar. Low volatility is something we should keep an eye on. Previous breakouts from such low volatility readings resulted in sharp price swings.