Is USD Volatility About To Return?
Faraday Research | Mar 22, 2018 05:33AM ET
US dollar bulls failed to materialise when it was apparent the Fed are veering towards three hikes this year. Yet even if four hypothetical hikes were presented it remains debatable to how long the bullish reaction would have lasted, considering the brewing trade wars, that ‘pesky’ Mueller probe and twin deficits which cloud the dollar’s upside.
With the bearish trend remaining far from challenged on the US dollar index (DXY), we note that volatility is showing signs of picking up. And with Trump due to announce fresh tariffs later today we’re on the lookout for the next round of range expansion.
The weekly chart shows (DXY) is within a firm downtrend and beneath its 3-month rolling average. It may be too soon to state we’ve seen the end of a correction from the 88.25 low, but a bearish hammer shows a firm rejection of 90.93 to at least suggest it as a possibility. That prices haven’t looked back since retreating from 90.93 and DXY is near the bottom of a four-week range is also constructive for further downside. But what has really caught our attention is the two narrow-ranged weeks following the bearish hammer, as we could be on the cusp of range expansion.
The theory here is that if range expansion is seen on DXY, chances are it will be widespread for USD pairs and related markets. And if the next directional move is to the downside it presents a few opportunities to consider.
An obvious choice is EUR/USD as DXY is heavily weighted towards it. Holding above its bullish trendline we see similar coiling price action that WTI presented recently. If we are to see a decisive break then we could consider long trades.
Sticking with the commodities theme, commodity FX also warrants a closer look. Although they have been under heavy selling pressure in recent weeks, USD/CAD has performed an impressive U-turn from recent highs and could pave the way for AUD and NZD to follow.
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GBP/USD continues its ascent after stronger wage growth and Brexit developments. Admittedly we’ve already seen the breakout from compression (not too dissimilar to WTI’s) so we now need volatility to subside. But it is another piece in the puzzle for potential broad USD weakness.
We’ll continue to monitor each pair with its own merits as there’s no guarantee any of them will stick with the USD bearish bias. But that we’ve seen DXY compress and show signs of expansion, it allows us to prepare for the next bout of volatility.
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