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2009 FX Review

In a year that will end dramatically different than it began, the US Dollar emerged as a focal point amongst global investors. In the final days of 2009 there is a renewed sense of optimism and hope for continued economic recovery, a far cry from investor's nervousness and skepticism that characterized the beginning of the year. The US Dollar, which had received a safe haven bid during the financial crisis, had now become the funding currency for a new carry trade. The so called risk trade of 2009 or Dollar carry trade featured stronger equity and commodity prices at the expense of the Greenback.


While most of 2008 was marred by risk aversion and volatility, investor's appetite for risk-taking had been restored by early spring 2009. A series of measures by the Obama administration and the Federal Reserve reinstilled confidence into the financial institutions and more importantly the market. Solid first quarter results and guidance by the same financial institutions set the table for the risk trade of 2009 to flourish.


The Fed's outward promise to keep rates low for an extended period of time punished the Greenback, allowing commodities to reflate and equity markets to surge to extraordinary yearly gains. Gold prices lept to fresh record highs by summer's end as the risk trade continued to gain momentum. The Dollar carry eventually climaxed at the end of November with the Japanese Yen reaching a fresh 14-year high against the Greenback.


Risk aversion that stemmed from Dubai World's debt postponement created a massive flight-to-safety into bonds. The sudden drop and subsequent recovery in yields highlighted the end of a shrinking yield differential between the US and Japan. The surge in the Yen was a wake-up call for the BOJ, which consequently expressed concerns of deflation due to currency appreciation. While equity markets have remained robust, the Dollar carry has begun to unravel as yields and yield differentials have continued to improve. Expectations of rate hikes by the Fed, along with weakness in the Europe have helped the Greenback to rebound and Gold to plummet heading into 2010.


10 KEY TECHNICAL EVENTS OF 2009 (in chronological order)


1. The USD/JPY fails at 87.05 on January 20th, marking a 4-week double bottom formation. Daily bullish diverging studies help buoy a recovery that lasts 10 weeks.

2. At 67% below it's 200-day MA, bullish diverging daily studies buoy the Dow Jones Industrial Average out of a short-term falling wedge on March 9th. The unprecedented recovery from the March lows has lasted nearly 9 months and continues to mark fresh year-to-date highs.


3. The EUR/USD convingly clears the 20-day MA on March 11th for the first time in 2009. The Dollar Index (DXY) closes below the 20-day MA to highlight a false-break pattern of the November 2008 high.


4. The USD/JPY clears the 200-day MA only days before, but on April 6th ends a 10-week recovery by rejecting near 101.60, a former key pivot support level. This would mark the USD/JPY's 2009 high.


5. On June 16th the EUR/USD rebounds off a key Fibonacci retracement at 1.3748 (38.2% of the entire range from the 2008 high to 2009 low) after same pivot formerly served as resistance. The EUR/USD respected the 50% and 61.8% retracement pivots in the ensuing months.


6. Gold breaks above a 4-week trendline on September 2nd, then breaches a 3-month trendline a few hours later. The following day, Gold breaks-out of a 16-month triangle pattern, ending months of consolidation. A month later Gold reaches a new all-time high.


7. The USD/JPY briefly probes below 85.00 before recovering on November 27th. The capitulation-type low marks a wide ranging white spinning top formation. The USD/JPY rallies off the 14-year low, recovering 8 Yen in the last 4 weeks.


8. The 2-year Treasury yield recovers from a steep decline, nearly reaching .60% on November 30th. The subsequent recovery highlights a possible a 11-month double bottom. Yields across the curve have enjoyed a spectacular run to end the year.


9. Gold hits another fresh record high above 1225 on December 3rd ahead of a bearish close. A daily spinning top formation at extraordinarily overbought levels on weekly and daily studies confirm Gold's blow-off top formation.


10. The EUR/USD breaks down out of a large 9-month rising wedge and a smaller 4-week rising wedge on December 4th to highlight a 10-day double top formation. A daily RSI triangle breakout and subsequent loss of 50-day MA support highlight a change in trend that has benefitted the DXY the last few weeks of the year.

(http://fxtrends2010.blogspot.com for 2010 posts)

12/08 - Dow Jones completes a symmetrical zig-zag

The Dow Jones Industrial Average has stalled near an equality target at 10495 (1.000x of 6470 to 8878 from 8087), suggesting the possible completion of a symmetrical zig-zag correction off 6470 (the March 2009 low). When comparing the first and last waves of the zig-zag, the latter part has taken 21 weeks to complete, compared to the initial wave's 14 weeks. This implies that the current rally is slowing down, which is characteristic of a weaker trend. Daily and weekly indicators are also deteriorating. The 9 &18-day moving averages are poised for a bearish cross. Daily bearish RSI and Stochastic divergence (23 November-04 December highs) and weekly bearish RSI divergence (21 September - 04 December highs) could induce a pullback that would highlight bear trendline resistance (connecting the 19 May 2008 and the 02/04 December highs). This would stage a retest of 10120 (21 Oct former high) ahead of a possible deeper correction towards 9999 (61.8% of 9679/10517). A sustained clearance of 10480 (bear trendline) negates the pullback scenario and suggests a possible extension towards 10561 (03 October 2008 intraday high).

11/18 - 9-period RSI triangle pattern should be watched

Both the DXY (US Dollar Index) and EUR/USD have formed triangle patterns within their respective 9-period daily RSI indicators. A break above RSI formation resistance & above 1-week trendline resistance at 1.4990 should reinvigorate EUR/USD bulls back towards the 1.5030-65 zone, above which exposes channel & wedge resistance at 1.5190. Below RSI formation support, however, coupled by a loss of the 50-day MA at 1.4808 (projected) would shift near-term expectations towards the bottom of a 3-month bull triangle at 1.4753. This would translate into an upside breach of the DXY's 20-day MA and would refocus the resistant 50-day MA now at 75.63.

11/14 - Inflection point for risk appetite

With all the media focus attributing strength in the stock market to weakness in the US Dollar, I believe this correlation is being misrepresented and is often misunderstood. In fact, I believe the exact opposite, that the exuberance seen in equity prices (coupled with the record high price of Gold) is driving the DXY (Dollar Index) lower. It was the stock market (the financial stocks such as Lehman Brothers to be more specific) that initially created market panic and risk aversion world-wide. The Greenback was merely a bi-standard and rallied as a result of the reduction of risk-taking. Since March, however, it has been a different story, while stock markets and risk appetite have recovered, the Buck has reverted back to weakness. And since early September, the point when Gold broke-out of a long-term trend of consolidation, the DXY has continued it's persistent downtrend. While the fundamental outlook remains grim for dollar bulls, there are several "technical" signs that the current trend may be nearing an inflection point. In late February, I noted that there were signs that the on-going trend of dollar strength & equity weakness were showing signs of abating. I used factors such as the stock price in relation to their 200-day MA's, formation of topping & bottoming patterns in various markets and Elliot wave counts for the basis of my argument. It was only a few weeks later in March that the market began to turn. Well, I am seeing similar "technical" indications now, but of course in a different way. First off, Gold, which is now becoming extremely overbought according to weekly & daily charts, is now in the process of completing a "5 of a 5". This Elliot wave term means that Gold is nearing the completion of the fifth wave of a larger 5-wave move, suggesting that a substantial correction is possible. In addition to stock indices being almost 20% (18% to be exact) above their 200-day MA, volume has been characteristically weak and leadership of the financial stocks has shifted as of late. The Dow Jones Industrial Average is bumping up against bull channel resistance at a key juncture (10340 - a major 50% retracement). The S&P 500 has only marginally breached its October high and is in jeopardy of resembling a possible double top pattern. And the NASDAQ is possibly forming the right shoulder of a head & shoulders top. All 3 indices are demonstrating possible daily bearish RSI & MACD divergence. While, I am not inferring for one to sell their entire stock portfolio, I am simply insisting that the market is due for some sort of consolidation or correction, and that the backdrop maybe shifting beneficially for the US Dollar. One of my core recommendations include buying the USD/CAD when the so called "risk trade" has gone too far.

11/11 - EUR/USD probes above channel midpoint

If the double top scenario for the EUR/USD (and double bottom for the DXY) is negated, the 1.5190 region is next targeted (wedge, channel & RSI projections). Meanwhile, the structure remains bullish until the 50-day & 10-week MA's are decisively broken to the downside.

11/04 - EUR/USD tests channel midpoint

The EUR/USD found support near the 50-day MA, forming the base of a 3-month bullish channel. The 40 level on RSI provided support once again, allowing a test of the bull channel's midpoint near the 1.49 handle. A failure here could provide an opportunity to retest the 50-day MA & channel support at 1.4655/85. Clearance suggests a retest of recent highs made in October.

10/27 - EUR/USD eyes wedge/key MA

10/26 - DXY rebounds above the 10-day MA

10/21 - DXY rejects at key moving average

The US Dollar Index failed once again at the key 10-day MA. This allowed the EUR/USD to advance above the 1.50 threshold and now possibly sets the stage for further weakness in the Greenback. The absence of weekly divergence and lack of substantial resistance leave room for the EUR/USD to advance towards the 1.52 region, unless risk aversion reappears as it did in the final hour of North American trade Wednesday. Either way, the 10-day MA has become the proverbial line in the sand for the DXY & EUR/USD. All market participants should keep a careful eye on these key moving averages to determine whether a pullback could materialize into a more meaningful correction.

DXY maintains key support

The US Dollar Index maintains wedge trendline support and a key Fibonacci retracement (78.6% of July 08 to March 09 range) remains in place despite failing to overcome the 10-day MA & the 76 handle (former pivot support turned resistance). Meanwhile, the EUR/USD retreated after failing to breach the coveted 1.50 barrier, highlighting 4-hourly bearish MACD, RSI & Stochastics divergence. More importantly, Tuesday's reaction low has highlighted a short-term rising wedge, while 4-hourly RSI has formed a Head & Shoulders pattern. A break below wedge support & the 10-day MA (under the 1.49 region) together with a loss of RSI neckline support near 50, could suggest a deeper retreat towards the 35-day EMA (near 1.4750). A 4-hour close above 1.50, however, will negate the wedge scenario and could trigger a parabolic move up towards 1.52.

10/19 - DXY fails at former pivot & 10-day MA

10/16 - MISSED SELL ENTRY POINT

10/15 - DXY maintains wedge support, key Fib

The US Dollar Index continues to maintain support at a wedge trendline and at a key Fibonacci retracement (78.6% of July 08 to March 09 range) just below 75.50. A strong close (for Friday) is now necessary to round-up daily RSI & MACD to confirm bullish divergence. The resistant 10-day MA will be the key test to determine whether the Greenback can recover. Failure to reclaim this fast, yet important moving average will likely leave the DXY susceptible to a capitulation-type sell-off. The EUR/USD is in a similar position. Recent strength is now probing a wedge trendline at similar resistance levels seen two years ago during the last bull campaign. Below rising 10-day MA support will confirm bearish divergence and signal a broader correction.

While it may be premature to buy the Greenback, bearish price-action in Gold and the Loonie are reasons alone for a possible reversal.

10/13 - DXY fails at key moving average, eyes wedge bottom

10/09 - CHART OF THE WEEK

10/08 - DXY probes key support near the 76 handle

The US Dollar Index retested key support just below the 76 handle. While this pivot managed to support once again, time is running out for the Greenback. A positive daily close is required for Friday to round-up daily MACD and complete bullish divergence. The next level of support is in the 76.50 region, where projected falling wedge trendline & a Fibonacci projection reside. The EUR/USD surpassed the 78.6% Fibonacci retracement at 1.4768, but failed to retest the yearly high. Beyond 1.4847 (2009 high) is 1.4914, where projected rising wedge resistance & a weekly pivot lie. Meanwhile, spot Gold continues to extend to record highs. While daily RSI is at extreme overbought conditions (80), there is no divergence yet. Thus, dips should be accumulated until daily studies display bearish divergence.

10/06 - DXY down as Gold surges to fresh record highs

Spot Gold broke-out of a 3-week triangle to begin the week, triggering Tuesday's fresh record high. The pattern break-out projects a move to the 1050 region, where extreme overbought RSI levels could delay further upside potential . In the meantime, oversold (hourly/4-hourly studies) dips below the previous record high (1033) should be accumulated. Meanwhile, the US Dollar Index, which rejected at the 35-day exponential moving average last week, fell below the 10-day MA. A retest of the 76 handle (September 2008 & 2009 pivot) is now more than likely, unless the DXY can somehow reclaim the 10-day MA (now at 76.70). The EUR/USD has rebounded from last week's oversold RSI base and has surged through the formerly resistant 10-day MA. A key Fibonacci retracement at 1.4768 (78.6% of latest downleg) is the only viable resistance level ahead of the yearly high at 1.4847. The reaction at 1.4847 or 76.00 DXY will be the critical factor in determining whether the Greenback is amidst a potential bottoming process or merely beginning another bear campaign.

10/02 - Chart of the week