Daily Trading Edge

In an environment where the quarter-point rate cut seemed to be fully discounted, the aussie’s strength last week was not characteristic of a currency that was about to be weakened by its central bank.

Monday – the day before the RBA decision on rates – and the Australian dollar is weaker out of the gate falling against everything but the weaker loonie. (I’ll cover the loonie in a separate update)

The AUD/CAD is telling an interesting story as the miss this morning in the Canadian GDP not only resulted in loonie selling as the number disappointed but also had an effect on what could be seen as some rate hike expectations unwinding. Since there is a large segment of the market that is strengthening the loonie on expectations that the central bank will hike rates, there has be equally a concern between now and then and weak data could reduce the change of a rate hike.

Past performance is not indicative of future results

The daily AUD/CAD is bouncing into a swing short trigger at the 20 period SMA close and the 34 period EMA high as the aussie’s weakness was outpaced by loonie selling.

The likelihood for exhaustion will come as traders refocus on tonight’s RBA event and the rate but in the Australian dollar. The aussie has been sinking again versus the greenback as the daily chart of the AUD/USD has transitioned into a sideways market phase. While there is certainly more bearishness in this pair, the downtrend is no longer intact and therefore today’s move is one of exhaustion against a 50DMA ceiling and the 1.0480 to 1.0500 area that waits just overhead. The AUD/USD also stalled at the 1.0464 high from April 3. The April 3 high is relevant not only because it is a near-term high and a defining level...

I think the dollar’s pierce of the triangle is not going to result in follow-through to the downside. That expectation comes from the back and forth chop that the greenback has been in on the daily time frame. The chop increases the likelihood of exhaustion and therefore pierces - like we see today - have a nasty way of yanking traders’ chains but not garnering sufficient momentum for a sustained move.

The dollar was congesting and as prices traded into the narrows of the pattern, the congestion turned into consolidation. This tightening of the range often promised to be the “coiled spring” that could release higher or lower depending upon who takes control of sentiment as the market is neutral.

By the way, the dollar is not alone in its indecision. The Dow is faring no better as it has yet to close beyond the range of the April 17 candle.

As the Fed decision looms. It’s not surprising that both the dollar and Dow has retracted back into their respective ranges. It’s what I call “guillotine syndrome”. Who wants to stick their neck out in front of such a potentially volatile situation especially when there’s no dominant trend on either of these daily charts?

Just like the pierce of 1.3000 suckered many-a-trader into a short position despite the daily chop on the EUR/USD, I suspect that today’s dollar pierce could be doing the same. Although consider the argument on the bears’ side - and it’s not unjustified: If the Fed signals QE, the dollar will breakdown.

The risk ON environment today certainly was part of the dollar’s weakness but the wick ("shadow") hanging below today’s candle body says a lot about the bears who were unwilling to keep the selling pressure on despite the uptrend line breakdown.

The Japanese yen has continued to weaken as risk appetite hasn’t faded from the market psychology yet. With the Dow maintaining gains but remaining rang-bound there is not a strong surge but rather optimism in the market.

The Dow’s strength is weakening the yen. The same yen that was stronger as the Dow pulled back, broke the uptrend on the daily chart, and sunk through 13,000. Now with a choppy range forming and prices pushing higher in the range, the yen is sinking on risk appetite.

Past performance is not indicative of future results

The Dow’s choppy range is now dominating market psychology and pushing the yen back lower.

The yen has been maintaining some strength versus the Australian dollar and the U.S. dollar, but the resilient euro has pushed the EUR/JPY higher towards 108.00. The EUR/JPY has got support from the 200DMA which was where the current rally began on April 16 after making at low at 104.61.

Past performance is not indicative of future results

The daily EUR/JPY has bounces from the 200DMA. This bounce is fueled by a stronger euro and weaker yen as risk appetite is taking over sentiment.

The question is how much longer can the Dow pressure the highs of the April 17 range before the momentum fades and can the bulls find footing above 13,000? The Dow is not in an uptrend any longer so exhaustion would be expected as prices reach the highs of the choppy trading range but those highs...

The U.S. Dollar Index has had a nice move higher but when you step back to assess where it’s now poised, it’s sitting in an area of multiple resistance levels despite now having broken the range of the triangle pattern.

Last week I discussed the range-bound trading in the greenback and even though price action has poked its head above the downtrend line resistance of a symmetrical triangle, there are still a number of upside obstacles waiting overhead. This is not a dollar that has blue skies above it, rather, it’s going to have to fly through some rough weather if it’s to continue to climb to 81.00. Here’ why I don’t think this is likely…until or unless we get some clarity about QE…which is the only thing I can see on the horizon that could yank the dollar out of this chop.

Past performance is not indicative of future results

The U.S. Dollar Index has made a move through the triangle but notice that this is one of four obstacles between today’s high and 81.00.

The dollar would be pushed lower is the reality of near-term QE came into focus. This is not the case yet but the market continues to parse every Fed utterance for clues.

The Dow’s recent downtrend (but not downtrend!) would typically be considered a reason for the dollar to rally but with QE hanging over its head; it is stuck in a range.

Technically, the U.S. Dollar Index is in a chop as reflected by the “two to four o’clock” angle of the 34EMA Wave. This environment increases the likelihood of exhaustion as prices approach and trade into the range high and range low area.

The AUD/JPY has continued lower from the resistance level discussed on the previous update and this move...