Targets met; consolidation phase before next round of sustained rally:
The bull-rally chase in DXY from 84.50 met set target at 92.50 (up at 92.52 from mid October 2014 low of 84.47) and thereafter into consolidation mode at 91.50-92.50. In traction with DXY, EUR/USD is down from 1.2885 to set consolidation target zone of 1.1650-1.1850 (low at 1.1753) and GBP/USD down from 1.6524 to 1.50-1.52 target (low at 1.5032). However, USD/JPY lost traction with DXY post the 105.18 to 121.84 move (high of 8/12) short of 123.50-125 target for deep push-back into 115.56, before consolidation at 118-121 (within set big-picture at 115/116.50-123.50/125). The strength of USD is attributed to combination of economic and monetary fundamentals in favour of the US, as investor monies from developed economies flow into the US, chasing higher valuation (both in equity and bonds) and USD currency gains against zero (or negative) cost of funding. It's perfect leveraged carry-trade play to encash gains both in underlying asset and USD exchange rate; with aggregate return of over 20% in less than 3 months on zero-leverage and astronomical return on leveraged play! What more to ask for?
What next? USD expected to retain this competitive edge in 2015
Post this mid-October 2014 to start of 2015 rally, the outlook is for consolidation in DXY at 90.50/91.50-92.50; EUR/USD at 1.1675-1.1875, GBP/USD at 1.50-1.52 and USD/JPY at 118-121.
How long (and stretched) will be the consolidation play? Will short-squeeze trigger extend the recovery beyond the set outer limit for steep correction before start of next bull-run beyond 92.52 (DXY); 1.1753 (EUR); 1.5032 (GBP) and 121.84 (JPY)?
DXY strategic support is now at 91.35-91.50 and 90.50-90.65, seen as strong base to build bullish momentum to take out 92.50-92.65 for next target at 94.00-94.15. The correction from 92.52 is shallow at 91.90 and may not have steam beyond 91.50. The strategy therefore is to stay in buy-dips mode to be with long-term bullish undertone. It is near-zero probability for sharp reversal below 90.50-90.65, hence prefer near-term consolidation at 90.65/91.35-94.15.
EUR/USD correction from 1.1753 has hit 1.1846 (ahead of 1.1850-1.1875 resistance zone). While retaining this zone as solid, deeper pull-back into 1.1950-1.2025 is not ruled out before gaining steam for 1.1650-1.1750. The strategy for big-play is to sell (and reinstate shorts) in multiple lots at 1.1850-1.1875, 1.1925-1.1950 and 1.2000-1.2025 (with tight stop) for 1.1625-1.1650, not ruling out extension into 1.1375.
GBP/USD correction from 1.5032 hit 1.5174 (short of 1.5175-1.5200 resistance zone) with momentum intact for overshoot into 1.52-1.53 before gaining steam to take out 1.5025-1.5050 for 1.4800-1.4850. The strategy for big-play is to sell in 2 lots at 1.5175-1.5200 and 1.5275-1.5300 with tight stop at 1.5325 for 1.4800-1.4850.
USD/JPY is little different; got the most of carry-trade advantage from mid-October to 8th December 2014 with equity index appreciation of 24% (up from 14529 to 18030) and USD up by 16% (from 105.18 to 121.84), thus triggering unwind of leveraged carry-trade play (with exit of USD/JPY hedge) ahead of year-end 2014, for sharp push-back in NIKKEI index from 18030 to 16672 (USD/JPY down from 121.84 to 115.56) before stability at 16800-17400 (and 118-121). Given the ultra accommodative monetary policy stance of BOJ, this game will be a sustainable one till FED clarity on timing of rate action. Till then, retain the set big-picture range of 115/116.50-122/123.50/125 with buy-dips strategy in multiple lots at 118.00-118.50; 116.50-117.00 and 115.00-115.50 for 121-122 and 124-125.
Moses Harding
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