US Dollar Rally Fractures

We are now seeing US dollar strength wane, and in some cases, reverse. Individual pair analysis now becomes more important than simply saying “the dollar will strengthen.” The dollar seems likely to weaken further versus NZD and AUD, so as we pointed out a few weeks ago, the “China slowing” meme is being reversed (see AUDUSD in the link). It’s a bit ironic that US stocks are hitting new highs based mainly on “intervention” while most think Chinese “intervention” can’t work.

Let’s examine the action on the daily charts.

EURUSD

Friday Reversal Pushes Above Short Term Resistance
Friday Reversal Pushes Above Short Term Resistance

Prices found support on Friday near the level where wave (v) was equal to wave (i). While the door is still open for one more new low to complete wave 1, the very short term trend is up. What creates the ambiguity is the fact that the action down from the wave (iv) top isn’t a clear impulse. It’s either a completed diagonal, or still needs wave v of (v) to a marginal new low. A push above 1.2706 would cement the current labeling. Until then, we can use the short term up trendline that is drawn off the low as an early warning indicator that wave 1 is still underway. While above that, we’ll assume prices are bouncing in wave 2, especially considering the two “long tails” in a row on the weekly chart (not shown). Action once prices reach the turquoise down trendline will also give us an indication of what direction prices will head over the coming month or two.

GBPUSD

Extreme Weakness Could Complete the Impulse
Extreme Weakness Could Complete the Impulse

Unlike the euro, the pound continued to weaken this week. While it’s not clear that the impulsive decline is complete, we’ve placed a speculative label there based on action in other markets. GBPUSD is not a market we’re looking at to play USD weakness, though. It’s true there’s bullish divergences in place, but since we can’t count five waves down clearly, there’s little reason to fight the trend until evidence appears. Wait for a break above the grey down trendline, or a touch of the 100% expansion at 1.5523 before expecting further upside.

AUDUSD

At Down Trendline, Looking For Break
At Down Trendline, Looking For Break

Last week we said that five waves down from the wave (iv) high were in place, and that a push above .8750 would mean the wave B bounce was underway. Bulls won the week, pushing above .8750 on Friday, and prices closed right at the down trendline. A break of that line is expected, and then a retest of that line, and Friday’s low, would provide an interesting opportunity. We mentioned a few weeks ago that the “China slowing” argument was thoroughly believed, and the decline in AUDUSD showed that. Is the tide of that opinion starting to turn? Regardless, we’re looking for a push back into the range of the prior 4th wave, at a minimum over the coming weeks and possibly months.

NZDUSD

Trendline Break Clears the Way
Trendline Break Clears the Way

Prices were able to push through the down trendline mid-week, and Friday’s action retested the broken line. After bouncing from structural support around .7700, prices have bounced in an impulsive manner, lending credence to the idea that wave (1) or (A) is complete. Last week, we mentioned the prior Friday’s bullish engulfing pattern, and that reversal signals shouldn’t be ignored the week before. Hopefully, we helped keep you on the right side of NZD. The action in this “leading pair” is one reason we think the USD is ready for some further weakness elsewhere too. We may look to NZDJPY later in the week, in addition to NZDUSD from the bullish side.

USDJPY

USDJPY Rally Slowing
USDJPY Rally Slowing

It’s a bit dangerous to stand in the way of a runaway bull market, and a central bank, like the Bank of Japan, intent on destroying its currency (Is there any central bank who isn’t!?!). That said, the twin channel resistance lines (grey and turquoise) should provide some resistance. We have reached into the resistance zone from the 2007 highs 114.64-118.00 as well, and momentum is diverging in a bearish manner. We can count five waves up for wave 3, so a pullback is due. We think the market will find support for at least one more push higher, though, so look for corrective weakness coming over the next few days-to-weeks.

USDCAD

Larger Trend is Still Up
Larger Trend is Still Up

Contrary to USD weakness elsewhere, it’s possible that a double zigzag is complete off the wave (iii) high. So, don’t ignore upside reversal signals next week in USDCAD, since prices have now returned to retest the area of broken resistance (structural support) at the wave 3 high. We’ll look for the grey up trendline to provide support, and only a break of that on a closing basis would cast any doubt into our larger view. Even then, critical support for our bullish count is much lower, down below 1.1100.

USDCHF

Declining But Supported
Declining But Supported

There may be further CHF strength coming over the next week or two as prices look to complete the wave (iv) correction, but ultimately we see the USDCHF rally is incomplete. There’s some substantial “event risk” coming, though, with the pending Swiss Gold Referendum on November 30. Should that pass, it’s clear that the Swiss National Bank (SNB) would have to halt its epic printing and selling of francs to buy euros, which likely would mean CHF strength. Based on our incomplete impulse up, and the corrective action down in USDCHF since 2012, it seems likely that the referendum will fail.

A new high prior to 9/30, though, would complete the impulse and set up a, “CHF strength, EUR weak and gold strength” trade. We’ll need to keep a close eye on this pair for any early indications of a potentially explosive outcome. Is it possible that a citizenry will finally regain partial control of their currency from bureaucrats?

If you’ve been noticing a desire for “change” lately (Arab spring, separatist movements, gold referendum, etc.), it’s part and parcel of the global governments’ mismanagement, and interference, of and in economic issues. Given global government debt levels, they need inflation; that is the exact opposite of what virtually every citizen wants – lower prices. This divergence of “interests” creates tremendous friction between governments and its citizens. As a result, expect this trend of “desire for change” to continue.

Happy Trading!

The Wolf

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge. The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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