It’s time for the US dollar to flex its muscles

April 22, 2014

A positive tone again in a quiet days trade in the US with a lot of the world out for Monday. But the S&P has managed to stretch its winning run to 5 days which is the best result since October last year.

So at the end of play the S&P 500 was up 7 points or 0.38% to 1872 in a remarkable recovery from the recent lows helped by some reasonable company earnings over the last couple of days. The Dow was 40 points higher rising 0.25% to 16,449 while the Nasdaq was up 0.65% to 4,122 aided by Weibo’s continued gains in it’s second day of trade.

This points to a solid open for Asia and the the Australian market today after the long weekend.

On Currency markets there hasn’t been a lot of action but Westpac reckons that things are looking up for the US dollar with the economic surprise index (ratio of better than expected data to worse than expected data) pointing to further US dollar gains. Euro sits at 1.3795, the pound it at 1.6792 and USDJPY sits at 102.59. The Aussie dollar is largely unchanged at 0.9325.

But today’s theme is that it is time for the US dollar to flex and then some so lets have a look at the set up for Euro and the Aussie as indicators of that potential strength.

Euro looks like it is headed lower after the clear signals that the ECB is intending to embark on its own quantitative easing phase of its unconventional monetary policy. Such a policy when instituted should see the Euro weaken relative to the US dollar and other currencies in what might finally be  a recognition of the weak state of the European economy.

A break of the trend line at 1.3668 would be the first signal that a deeper retracement is under way and a test, or break, of the 200 day moving average at 1.3562 has to be a high probability over the coming week.

AUD looks like its time in the sun might be at an end for the moment although it is worth noting that the CBA reckons it is headed into the high 9o’s later this year in contrast to almost every other forecaster out there who are looking for the 80’s.

The Aussie is currently testing the fast moving average I use along with the mid point of the Bollinger bands.  A break of 93 cents in the next day or so would signal a deeper move but there is a huge event risk tomorrow with the release of Q1 CPI at 11.30 so don’t expect too much prior to that.

Commodity markets had a huge night with a sea of red as palladium, wheat, coffee, lean hogs, oats, platinum, corn, lumber, natural gas, soybeans and rice all lost 1% or more with wheat and palladium tanking more than 3%. Gold was under pressure as well at $1,288 oz but the April Nymex crude contract is at $104.36.

On the data front today we get the Australian leading index along with a similar index in japan before CPI in Hing Kong and EU construction. tonight in the US the Redbook index is out along with existing home sales and the Richmond Fed index.

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