How Dangerous Are Technical Conditions For Dollar Bulls?

Anticipating a yawning divergence of monetary policy between the world’s largest central banks, market participants continued to drive the dollar higher over the past week.  In fact, the greenback appreciated against all the major and emerging market currencies except the Malaysian ringgit and South Korean won.  

Next week is one of the most eventful weeks of the year, and the speculative community has amassed a very large long dollar position.  It begs the question of whether the ECB cannot help but disappoint market expectations and spur a serious correction to the dollar’s rally, whose most recent leg higher began in the middle of October.  

Depending on one’s risk tolerance and ability to use derivatives, there are various strategies one can deploy that can minimize the impact of a dollar correction.  The cost is full participation of any additional dollar advance. In any event, disciplined money management skills require respecting the price action, even if not anticipating it.  

The Dollar Index closed above 100 for only the second time since 2003 (the first time was March 13). It has held a clear uptrend this month, which has been tested five times, including yesterday.  It is found near 100.40 at the end of next week.  The euro has not traded below its 20-day moving average since October 22.  It is found now near 99.00. The technical indicators are mostly constructive.  However, the MACDs are rolling over and have not confirmed the latest extension of the rally.  

The euro is holding below its own trendline, which is found near $1.0650 now and $1.0550 at the end of next week.  The technical indicators are similar to the Dollar Index, with only the MACDs suggesting a correction could be imminent. A short squeeze that lifts the euro through the $1.0660 area could carry it up toward $1.0750-$1.0800.  In some ways, the downside speaks for itself.  Although we recognized the $1.0525-$1.0550 area as the downside target ahead of the March low near $1.0460, we do not think that area is particularly significant.  Parity beckons.