Can the USD hold on to gains?

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Back in the 1980’s a corporate trader when asked about her thoughts on the USD simply stated, “buy dollars, wear diamonds!!”. That comment is once again looking a prophetic as we enter a new week.

Over the weekend, G7 finance ministers and central bankers, gathering near London, reiterated their commitment from the February meeting, “not to target exchange rates”. They did however pledge to monitor the BOJ’s policies and the impact of the JPY weakness on other currencies. There were various comments that came from the delegates.

German Finance minister Schaeuble said the delegates had an “intense discussion about Japan with their Japanese colleagues”, while UK Finance Minister Osborne commented that “G7 leaders pledged not to manipulate currencies and that Japan’s policies impressed delegates”. Bank of Japan Governor Kuroda re-affirmed central bank stance of meeting a 2% inflation target by 2015. He said this would be achieved by aggressive asset purchases as “easing will contribute to achieving the domestic objective of ending nearly 15 years of deflation”.

Adding to the “dollar euphoria” are various comments that the FED will begin to end the quantitative easing earlier than markets expected. Another point was made that as major stock indices continue their moves higher, investors are expected to move funds back from commodities, bonds, as well as the JPY into stock markets in the United States and Europe. Increasing strength in the DOW and the S&P 500 would contribute to USD strength according to analysts. We have discussed before how this correlation has come and gone over the years. It appears “higher dollar, higher DOW” is back in vogue.

As for the Eurozone, ECB president Draghi once again stated that the central bank is looking at “a variety of things” to boost lending, but no firm policy has been decided yet. Bank of Italy and ECB member Visco commented on the possibility of negative interests might be effective. This certainly was effective in bringing the EUR down to overnight lows EUR dropped from the 1.2990 area to 1.2960 “in a flash”. The fact that the currency at the moment is so oversold probably prevented any further decline. Technically, there is support at 1.2950, then 1.2915. The longer moving average trends have crossed the shorter moving average trends indicating more of a downside move this week. The longer the EUR remains below 1.3080, the stronger the bearish move becomes. Should the market reject the 1.2950 level a retracement back towards 1.3000 could happen quickly given the overall “shortness” of the market.

USD/JPY flirted with 102.00 overnight, before settling back to the 101.55-75 range. Traders are still expecting a move towards 105.00 by the summer, so this currency pair should remain bid.

AUD/USD struggled to regain parity overnight and briefly succeeded before falling towards support at .9980 once again.

USD/CAD remains above the 1.0100 level and most expect the currency pair to follow the commodities markets over the next few trading sessions. Support for USD/CAD is at 1.0100 and 1.0085. Resistance appears at 1.0135 and 1.0150.

US retail sales is the main economic release today. Expectations are for a drop of -0.3% in April.

It will be interesting to see if the USD can hold on to the gains made on Friday.

Further reading: Breaking down barriers

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About Author

Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.

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