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Currency trading in
the week ended January 16, 2004 featured widespread weakness against the U.S.
dollar. In addition to that, the weekly momentum deteriorated. Above weekly
charts show trend development in the past year for 5 prominent currencies as
well as the U.S. dollar index. Weekly stochastic indicator readings (14-period)
also provide a momentum perspective.
All six chart
stochastic readings turned from extreme levels, albeit only in the case of
the Canadian dollar, did the stochastic indicator turn confirm a divergence
(bearish).
Price action
established top reversal ranges in the EuroFX, yen, Swiss, and sterling while
the dollar index scored a bottom reversal. The weekly ranges in the EuroFX,
Swiss, and sterling were as large as, or larger than, any range in the past
year. From that behavior we infer that the markets reached levels that have
elicited aggressive selling pressure that is typical of some sort of turn
rather than of a countertrend dip. The stochastic indicator turns signify
momentum-based price vulnerability.
While we are
long-term bullish on select major currencies relative to the U.S. dollar, we
have been anticipating a trade weighted dollar index low in IVQ 2003 or IQ
2004 (October 7, 2003 report that predates this publication). The past week's
activity may be the start of an interim bottoming action. Admittedly, the
powerful downward dollar momentum seen during November-January suggests that
any dollar correction may be more shallow and short-lived than we would have
previously thought.
Wave structure since
early September, particularly noticeable in the EuroFX and Swiss(annotated in
those as well as sterling and the $ index), suggests that those markets have
probably completed 3 swings. If that is so, then one of two near-term price
scenarios is probable: either the markets will establish a fourth-swing
consolidation/correction that will be followed by another move into new high
ground (low ground for the $ index) or they have reached the end of a 3-swing
leg that is part of a larger corrective structure.
Our bias is that the
former scenario will play out; that there will be a relatively shallow,
generally sideways consolidation that forms a #4-swing triangle which will
support trend continuation. However, because of several factors, two of them
being the past week's Swiss reversal at the upper end of a long-term
resistance zone and the yen within what we think is a critical upside area
between approximately $.9380 and $.9600 (last week's high was $.9475), we
want to guard against being overly confident about relatively quick trend
resumption.
Trading in the past
week was at least a cautionary shot across the bows as regards a more
two-sided trading environment in the major currencies. Trading in the next 2
weeks should give us a better idea as to prevailing trend strength. Underlying
levels that we would watch are EuroFX $1.21, sterling $1.75, Swiss $.7750. Values
below those levels would suggest that markets are weaker than we currently
think.
Eidetic Research
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