Currency Market: US Dollar Index Failed on Another Test

By Cody Tafel  AUG 27, 2013 12:55 PM

The inability of the US Dollar Index to rally given the geopolitical turmoil of late is concerning.

 


The US Dollar Index failed late last week on another test of the 200-day moving average from below, and the inability of the DX to rally given the escalation of the situation in Syria is not a good sign. It seems like only a matter of time before the US Dollar Index will take out the June lows on the downside, and it looks like it is starting to ride the shorter-term 20-day moving average lower. The risk/reward has clearly shifted to the downside in the US dollar, and a break of the June lows would open the door for further downside into the mid 70s, which would coincide with the 2009 and 2011 lows. Sell rallies for now.


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Amazingly, the euro continues to grind higher and it looks to me like it wants to continue to rally with the February highs only a couple hundred pips away from current levels. This is a complete turnaround from about six weeks ago when it looked like the euro was about to collapse. Although it makes no sense to me at all, the euro looks like a better buy now, and should be bought on pullbacks for now. My only concern is if this trend changes when people get back after Labor Day, but we have to trade the market set in front of us at the moment -- even if it doesn’t make much sense!


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The Canadian dollar and the commodity currencies in general are the lone standouts that remain weak against the US dollar among the major currencies. Maybe this changes with the recent rallies in the energy and metals markets, but it is definitely worth noting when a certain area of the market acts weaker than the rest. If and when the US dollar is ever able to rally again, these commodity currencies should certainly be the leaders to the downside. See the weak Canadian dollar chart below.


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Positions in DX, M6B, M6E, MCD, and MJY futures.

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