November 16, 2009

US Dollar Versus Spot Foreign Currencies

The fall of the US Dollar is everyday financial news - but which individual markets are best poised to capitalize on the move?

The above series of weekly bar charts plots six prominent FX cross currency pairs against the US Dollar. Top row, left to right: Euro, Sterling and Aussie; bottom row, left to right: Franc, Yen and Loonie. Blue vertical dashed lines on each chart mark the dates from the swing low from Nov 05 and swing high from Jul 08 in the most dominant cross pair, the Euro vs US Dollar. Blue horizontal dashed lines note levels from the past representing polarity price targets. An Ichimoku Cloud is drawn on each cross pair, as well as a Fibonacci retracement grid from the swing high and low on each individual chart.

Looking at the top row, any decline in the chart would denote a strengthening US Dollar. Indeed, after a months long decline, the US Dollar did in fact recover beginning in Jul 08. This recovery was not equitable however, with the Euro holding up better from the longer-term perspective than either the Sterling or Aussie. The latter two made lower lows in each instance, denoting the greatest gains were not found in the Euro FX spot currency market.

Turning to the bottom row, any rise indicates a strengthening US Dollar. Trading nearly in unison with the Euro, the Franc did not relinquish its strangle hold either on the greenback, nor did the Yen. The Canadian Loonie, however, did give way to gains, turning much earlier than did every currency in this series of charts. The overall gains, however, were not out of line with gains seen in the Sterling and Aussie.

So where's the greatest potential and in which market can we find the greatest current strength? Looking first at the clouds, all but the Sterling has broken to favoring anything but the US Dollar. All five - Euro, Aussie, Franc, Yen and Loonie - are above or below their respective bearish Dollar cloud levels. Looking at the Fibonacci grids, once again the Sterling is holding weakest relative to the US Dollar in that it currently is holding below both its long-term polarity target and its 38% retracement level.

Should the Dollar base or fall from this point, the Sterling is perhaps positioned for the greatest move. It has, per the chart above, been consolidating for some time. Clues as to the long-term future of the US Dollar may in fact lie in British Isles. While the trend on the remaining five currency pairs is decidedly negative US Dollar, the Sterling has yet to set its longer-term course. Technicians should watch for a resolution in this FX cross pair closely for the foreseeable future.

Jeffery E. Lay, CMT
President
Talon Eight, LLC

Disclaimer: This post is intended solely to disseminate information, and is not, and shall not be construed to constitute financial, investment or other similar advice. All posted material should be independently verified for accuracy and current applicability. Readers of this post are referred to the Risk Disclosure for further information.

[Return to Analysis]