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US Dollar Index Failed at Breakout


Strength in the euro and yen has really hit the US Dollar Index in the past couple of weeks. It now sits at 200-day moving average support.

The US Dollar Index could not hold above the breakout levels around 84, and it has spiked lower over the past couple weeks. This is due to strength in the euro and yen, both of which have reversed downtrends. Obviously, this move caught me off guard, and I have been proven wrong on my bullish DX call in the short term. However, the DX sold off right to the 81 level and seems to be finding support right at the 200-day moving average. This 81 level will now be my line in the sand; if we start to see consecutive closes below the 200-day moving average, then it will be time to shift into "sell the rally" mode.

Click to enlarge

The euro rallied strongly after the ECB left rates unchanged last week, and it certainly seems like that caught the bears off guard. It now looks like the euro could be offsetting the bearish head-and-shoulders pattern that we have been watching form for basically a year now. Often these failed patterns lead to strong moves in the opposite direction, so I have exited almost all bearish euro positions over the past week. While I think this currency will still have some issues longer term, you can't ignore the message of the market, and it sure seems like this market is going higher for now. See the squeeze below.

Click to enlarge

The one group of currencies that have remained relatively weak against the US dollar are the commodity currencies, and the Aussie and New Zealand dollar have actually been making new lows, which is significant given how weak the US dollar has been lately. The Canadian dollar looks interesting to me here as it has rallied into resistance; if the USD does turn higher, then it could be a very good risk reward short at current levels.

As you can see in the below chart, the CADUSD cross has rallied into the 98 level, which should provide some decent resistance. Risk to the 200-day moving average is less than 200 pips, and I think there is downside potential to 0.90 or 800 pips lower, which sets up a nice 4 to 1 reward to risk ratio on Canadian dollar short position at current levels. See the setup below.

Click to enlarge

Volatility is definitely creeping back into the market, especially in the currencies, which is a little scary. Be careful out there and trade smaller, as it sure seems like things could continue to bounce around a lot!
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Positions in DX options, EC options, MCD futures.
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