Friday, January 7, 2011

FX Review: Majors and the USD Bullish case

Major currencies are all giving their gains to the US Dollar with once exception: the Canadian Dollar. According to a Research report by the Bespoke Investment Group ( "With a gain of 0.54 percentage points, Canada saw the biggest increase in percent of world market cap in 2010."

For the technical levels on the various currencies, please look at the brief technical annotations on the chart attached.

Against the dominant notion of the effects of FED's QE2 program the USD has been on a surge since the announcement of the plan in Nov '10. Technically the break of the 80 psychological level is a sign of strength seen also in the RSI and just recently the ADX Buy signal.
The grand battle should happen at the flat 200-DMA at 81.66 which if overtaken will result in a trend acceleration. Euro-zone Peripheral Debt problems coupled with the pending pullback in major Equity indices and Commodities would see a flight to safety into USTs and thus will boost the current trend in USD. This is a scenario in the making so I'm watching it vigilantly how it will play out.

This chart gives a vague idea of the correlation in the move of the UST 10-Year Yield and the current USD trend. Since mid Oct'10 the Yield starts to lead the direction of the USD which is presently lagging a big portion of the move and thus I assume an acceleration once the 200-DMA in the USD Index is taken out.

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