Wednesday, January 19, 2011

US Dollar Index Reversal tracking the Flattening 2Y-10Y UST Spread

The chart shows an extremely tight correlation of the US Dollar Index to the 2Y/10Y UST Notes Spread. The strength in the USD has been fueled by the Steepening in the spread following the Nov '10 announcement of the QE2 program.
This however seems to have run its course and the spread is turning flat along with the violent reversal in the USDX last week. This might be linked to an undergoing allocation into bonds or the effect of the ongoing bond purchases by the FED as the rate rise is postponed for the time being.

The reversal of the USDX ahead of the Resistance at the 200-DMA is a bearish sign and the ADX reading is signalling a pending Trend strengthening of the down move. RSI and Momentum indicators basically reflect the range trading conditions since Dec '10.

The EUR/USD staged a strong recovery off the 1.29 Support level as indicated in previous posts.
I had to rethink my thesis for USD strength in light of the latest developments and I assume the market will focus now on the unfolding Large Uptrend Channel as marked on the chart.

Trade wise I'd like to see a close above 1.35 for the 1.37 target to come in focus. I expect the price to lift into the 1.35-1.37 range for the next week. The bullish bias in the EUR/USD is present and only a close below 1.3240-50 would negate the present momentum and will force the market to re-think the current scenario.

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