Dollar Facing Most Serious Test since Bottoming

Monday’s strong rally in global stock indices and break in the Dollar renewed talk of the resumption of the negative correlation between global equity markets and the U.S. Dollar.

Monday’s strong rally in global stock indices and break in the Dollar renewed talk of the resumption of the negative correlation between global equity markets and the U.S. Dollar. Aggressive traders appeared to be already placing bets today that the Fed would continue to leave interest rates low for a prolonged period of time. Today’s action suggests that investors could be getting comfortable with taking on more risky assets once again.

The chart pattern in the U.S. Dollar Cash Index suggests that a new secondary lower top is forming at 78.22 and that the trend is poised to turn down on a break through the last main swing bottom at 77.33. The next downside objective is 76.31 to 75.80, which gives the market plenty of room to the downside.

The Dollar opened the first trading session of the year slightly better but a strong surge in U.K. and China manufacturing data helped to pressure the Dollar overnight. These two better than expected reports triggered renewed interest in demand for higher risk assets. Speculation is that global manufacturing will provide the spark for a worldwide recovery.

The daily chart pattern in the EUR USD suggests the first upside objective over the short-term remains 1.4680 to 1.4790. Whether traders go after this level will be determined by a slew of U.S. economic reports this week especially the employment report on January 8th. The Euro weakened throughout the day after an initial surge following the release of a firm U.S. manufacturing report.

The GBP USD followed through to the upside after last week’s late turnaround, but is failing to attract fresh buying at the mid-session because of short-term overbought conditions. The daily chart indicates that this market has room to the upside with 1.6355 to 1.6478 the next objective. The size of the rally of the past two days has made this market vulnerable to a short-term correction. Watch for a small pull-back to 1.6036 to 1.5988.

The USD JPY finished weaker after a steady to higher opening. The closing price reversal top formation on the daily chart suggests a minimum pullback to 90.75. . Traders feel the market has advanced enough and are reacting to overbought technical factors. In addition, renewed demand for higher yielding assets is helping to pressure the Dollar.

The USD CHF rallied over night but ran into technical pressure at a .618 level at 1.0419. Renewed interest in higher risk assets could send this currency pair back to 1.0212 to 1.0143 over the near-term. Watch for a possible technical bounce on the first test of this level.

After a slight retracement late last week, the USD CAD is once again under pressure. The main trend is down. The chart indicates developing selling pressure is likely to accelerate under an old main bottom at 1.0405, setting up a further decline to 1.0265. Strong rallies in gold and crude oil as well as equity markets are the driving forces behind today’s weakness in the USD CAD.

The AUD USD started the session steady to better, but surged to the upside following a pick-up in demand for higher risk assets. The strong rise in U.S. equity markets is helping to create demand for the higher yielding Aussie. Technical factors are also signaling new strength as this market has broken through a pair of retracement levels at .8964 to .9018. Continuing strength could drive this market to .9144 over the near-term.

The New Zealand Dollar overcame initial weakness with a quick turnaround last night on the news of the improvement in Chinese manufacturing. Strong upside momentum fueled by greater demand for higher yielding assets has put the NZD USD in a strong position to test Gann angle resistance at 73.30. Solid support has been established at .7185.