Dollar’s Near Term Bearishness Persists, Other Currencies Mixed

Market overviews

Dollar ended as the worst performing one last week as near term bearishness persisted. Q1’s rebound should have completed and the main question is whether it’s ready for new lows. That is, indeed, in favor unless overall risk-off sentiments were choked off by some unexpected events.

The forex markets were mixed elsewhere, however. Euro and Yen were the biggest winners but both failed to breakout from ranges except versus the greenback. Canadian Dollar attempted for rally after BoC, but failed to extend gains. Australian Dollar was surprisingly the second weakest, yet Kiwi was the third strongest.

Dollar index headed lower as investors shrugged tax hikes

Dollar ended the weak as broadly lower as traders continued to reverse the long positions accumulated in Q1. President Joe Biden’s plan to raise capital gain tax to highest post WWII level didn’t shake the markets much. Equity investors were still bullish considering the strong economic data from the US as well as in other parts of the world. Major indices including DOW, S&P 500 and NASDAQ ended the week with a strong rebound on Friday, keeping them in tight range.

Last week’s decline in the Dollar index further affirmed the case that corrective rebound from 89.20 low has completed with three waves up to 93.43 already, ahead of 38.2% retracement of 102.99 to 89.20 at 94.46. Near term outlook will remain bearish as long as 55 day EMA (now at 91.62) holds. Retest of 89.20 low should be seen next.

In the bigger picture, rejection by 55 week EMA is certainly a medium term bearish sign, and break of 89.20 low is likely. Yet, at this point, it’s unsure how deep DXY would fall to, as would then be close to 88.25 support. More importantly, 100% projection of 103.82 to 88.25 from 102.99 at 87.42 is just inches ahead. So, the break through 89.20 low could be shallow and brief. We’ll see how it goes at a later stage.

Euro extended rebound against Dollar, but sluggish elsewhere

While the weakness in Dollar is clear, developments in other currencies are relatively mixed. Euro ended as the strongest one with help from strong PMIs and not that dovish ECB. President Christine Lagarde sounded confident as progress with vaccinations, should “pave the way for a firm rebound in economic activity in the course of 2021”. Medium term risks also remained “more balanced”.

EUR/USD extended the rebound from 1.1703 and remains on track to 1.2242/2348 resistance zone. But EUR/JPY struggled to sustain gain after breaching 130.65 resistance to 130.95. EUR/GBP has yet to break through 0.8718 minor resistance after late rebound. EUR/AUD was also bounded in range of 1.5250/5689. More importantly, EUR/CHF is also still extending the corrective pattern from 1.1149. The common currency will need to break out in these pairs to give us more confidence on its underlying strength.

Canadian Dollar failed to ride on BoC for stronger rebound

Canadian Dollar was a disappointing one as there was no apparent follow through after the post-BoC rally. The Loonie ended the week mixed, to the weaker side. BoC did deliver the tapering of asset purchases from CAD 4B per week to CAD 3B per week. It also sounded much more upbeat and expected pare capacity to be fully absorbed by 2H22.

EUR/CAD’s steep decline from 1.5191 was later offset by Euro’s rebound. With 1.4949 minor support intact, rebound from 1.4723 could still extend and break of 1.5191 will target 1.5313 resistance.

CAD/JPY also couldn’t break through 86.88 minor resistance despite a rebound attempt. Correction from 88.28 could still extend and break of 85.40 will target 38.2% retracement of 77.91 to 88.28 at 84.31.

AUD/JPY recovered after testing 83.02 support

Talking about Yen, while it’s the second strongest last week, upside momentum was not too convincing except versus Dollar. AUD/JPY recovered after testing 83.02 support for the first time. We’re still slightly in favor to the case that it’s already in the third leg of the corrective pattern from 85.43. Break of 83.02 will likely bring deeper fall through 82.27 support. Though, strong rebound from current level, followed by break of 84.70, will bring retest of 85.43 high instead.

USD/CHF dropped further to 0.9127 last week but turned sideway since then. Initial bias remains neutral this week first. As 38.2% retracement of 0.8756 to 0.9471 at 0.9198 was taken out already, further fall is expected as long as 0.9244 resistance holds. Break of 0.9127 will resume the decline from 0.9471 for 61.8% retracement at 0.9029 next.

In the bigger picture, rejection by 61.8% retracement of 0.9901 to 0.8756 at 0.9464 argues that rebound from 0.8756 was probably just a corrective move. That is, larger down trend from 1.0237 might be still in progress. We’ll monitor the downside momentum of the decline from 0.9471, to assess the chance of breakthrough 0.8756 low at a later stage.

In the long term picture, price actions from 0.7065 (2011 low) are currently seen as developing into a long term corrective pattern, at least until a firm break of 1.0342 resistance.