Risk-Off Sees the Dollar Regain Strength at the Lows

• It was the risk-off end to the week which saw indices broadly lower and the US dollar gain strength and finish higher across the board.
• The Japanese yen was the second weakest currency last week, falling -0.93% against the USD whilst AUD fell -0.95%.
• China’s manufacturing PMI data expanded at its slowest pace in five months as coronavirus cases being to rise again. Keep an eye on AUD pairs and Asian indices as they may be on the back foot tomorrow.

From the CFTC weekly COT report (Commitment of Traders):

• Long exposure on Euro futures is its highest since October 2020.
• Net-long exposure was at an 8-month high on Nasdaq E-mini futures, ahead of the sell-off in the second half of last week.
• Traders remain heavily short the US dollar index, with bears at their most extreme positioning since March 2011.

Given the extreme bearish positioning of the US dollar, we should take note of the following technical signals which point to a potential bounce higher on the US dollar.

• Several reversal patterns have occurred on the monthly and weekly candles for USD pairs.
• A bullish engulfing on USD/MXN and USD/JPY weekly and monthly charts shows strength at the lows. Bearish hammer’s and rikshaw man doji on AUD/USD and NZD/USD monthly charts show weakness at the highs.
• A bullish engulfing candle has formed on the monthly and weekly chart on USD/JPY.

Today’s Calendar Events (Times are GMT+11 Sydney)

PMI data is mostly final reads, which tends to be less interesting to traders. However, keep an eye on the ISM manufacturing report in the US session as this is the one and only release, and can provide a risk on tone (if strong) or risk-off tone (if weak). Keep an eye on USD FX pairs, indices, gold and oil for headline reactions.

USD/JPY: Confirms Change of Trend

Broad dollar strength saw USD/JPY break convincingly higher above 104.42 resistance and produce a bullish engulfing candle on the monthly and weekly chart. Given the extreme short USD positioning, we are on guard for a bounce higher on the dollar and USD/JPY which looks like a good candidate for a potential bullish reversal.

The daily chart has produced a higher high and higher low, and Friday’s break out confirms a new bullish trend. Price action is also above the 50-day eMA for a third session, although it remains beneath the 200-day eMA which resides around a resistance zone.

• Bulls could seek bullish setups above 104.42 support and target the highs around 105.43-62 (note the 200-day eMA at the lower support zone).
• A break below 104.42 warns of a bull-trap, although the daily trend remains bullish above the 103.33 low.

USD/CHF: Third Time Lucky?

USD/CHF has ‘thrown a few spanners in the works’ these past few weeks with false breaks, bearish momentum and retesting of the highs. Trading can be like this sometimes. However, given the bullish breakout on USD/JPY, we are revisiting the Swissy’s potential to play catch up with USD/JPY.

The daily chart has forming a potential inverted H&S (head and shoulders) pattern which projects a target around 0.9090. Friday’s bullish engulfing candle has stalled just below 0.8920 resistance and the 50-day eMA (a break above one invalidates both technical resistance levels).

• A break above 0.8930 assume bullish continuation and brings the 0.9000 highs and 0.9090 target into focus.
• A more conservative approach is to wait for a daily, or four-hour close above resistance.
• A break beneath the small rising trendline suggests bears have regained control.

ASX 200 (AUS200): We Favour Fading into Rallies

The ASX200 had a bad ending to a bad week. Friday’s bearish session closed right back near range lows, and we see any bounce from current as something to potentially fade (sell) into. 6640 could to be a pivotal area of resistance, and it sits the 38.2% Fibonacci ratio. If prices retrace to this area we would look for bearish reversal candles on the daily, four-hour or hourly chart before considering a swing trade short.

• A break below 6540 assumes bearish continuation and brings the 6375 – 6330 zone into focus.
• There’s potential for a minor bounce higher before prices break lower, and we would look for signs of weakness around the 23.6% or 38.2% Fibonacci ratios to consider fading into.