by Pinchas Cohen
Fundamentals now support the greenback. Traders can take a small risk with a big reward by entering a contrarian, short position, while an August peak breakout would bring everything together for a dollar bottom reversal.
Dollar traders are suddenly wallowing in an embarrassment of fundamental riches, as they're being bombarded by bullish news:
- A Fed chief who’s bent on a December hike
- The finally-introduced framework for President Donald Trump's much-anticipated tax-reform
- Speculation that Trump might appoint a Fed Chief who’d charge ahead with tighter regulations after last week's interviews with Fed governor Jerome Powell and former Fed governor Kevin Warsh
- The euro’s decline on political uncertainties coming out of Germany and Spain.
The term 'strike when the iron is hot' comes to mind regarding the greenback right now.
Of course, this could all reverse again, if market anticipation is met by investor disappointment with reality. Still, over the short-term at least, it doesn’t seem like any of the fundamental reasons mentioned above will change.
Multiple Ways To Trade Budding USD Bull
There are a number of ways to trade this newfound dollar bull sentiment – long dollar, short yields or gold. Oil, too, may have been affected by a strengthening dollar, making the dollar-based commodity more expensive and rendering it rangebound.
All these assets have reached a resistance/support point, and for the time being, they are each respecting those key levels, as traders on the other side apply opposing pressure.
To keep things simple, we will focus on the Dollar Index.
The greenback had taken a fall on politics and economics, while its biggest counterpart, the common currency, enjoyed a golden period of political stability and economic growth.
In a harsh reminder that even the best analysts are nothing more than people trying to navigate the stormy market seas with a technical or fundamental 'map' while paddling furiously in order to stay afloat, all recent certainties have changed over the course of a week.
The dollar rebounded from its 91.01 near three-year low, in a challenge to its FX peers, who have been keeping it bound within its falling channel. Until last Thursday, the channel-top had provided the necessary resistance to keep it within its trading prison, but but only after the level crossed above the 50 dma (green) which has since provided it with cushiony support but today it is again above it, as of 5:48 EDT.
A registered point above the August 16, 94.14 high may signal a reversal, something long awaited by dollar traders. Note that the 100 dma (blue) rushes to guard that key level.
Trading Strategies
Conservative traders don’t trade against the trend, and the Dollar Index is still within a downtrend, at least until it crosses over the August peak.
Moderate traders may wait for a further rise to the 94 resistance level of the August peak, then short, with a stop-loss above the 94.14 August high.
Aggressive traders may ignore the politics since technically, the dollar is primed for a short having reached the double-resistance of the channel-top and last week’s Bearish Engulfing pattern.
Whatever your outlook, a short provides a dreamy risk-reward ratio, with a stop-loss above the September 28, 93.67 high, with a minimum-target of the short-term uptrend line from September 8. The price might meet with it at the 92.70 level, a support-resistance area (dotted line) and the 50 dma (green). A moderate target would be the retesting of the 91 low. The full target might be the next time the price reaches the channel-bottom.