The commonality between and among currency pairs is the overbought / oversold plague driving prices in the middle of the curve. Oversold / Overbought applies to EUR/USD, AUD/USD, NZD/USD, USD/JPY and USD/CAD but not to GBP/USD and USD/CHF. The DXY is no different in the oversold /overbought matrix as its price is severely overbought but price is driven by promise of a Fed Funds hike and fundamentals better than its counterpart pairs. AUD, NZD and CAD are threatened by rate cuts and poor fundamentals while EUR and CHF rates are negative and non thrilling fundamentals. GBP is the outlier as money markets price a Bank Rate rise due to recent Wage increases but this situation lead to price in a neutral position and slow grinding movments. Between interest rates and fundamentals, currency pair prices are deeply divided in the middle section of the curve as prices trade at far wide polar opposites. The EUR/USD for example reaches extremes at 1.0591 and 1.0322 while DXY extends extreme prices from 100.43 – 107.56. From the EUR/USD close at 1.1106 and DXY 96.27, the difference is roughly 800 vs 1100 pips. Points 800 Vs 1100 seems wide in itself but to reach the extremes may take formal Grexit or a Fed Funds rise.
The important DXY break occurred last year at 80.27, the 10 year average. That average today is found at 82.06 and the most overbought from its counterparts at the 5 year, 2 and 1 year average. Although the 5 year is running a close second. What’s driving prices is short term averages at the 1 year point but 1 year oversold averages are forcing overbought / oversold extremes in averages at the 1500 day and 5 year averages. The 1 year average is located at 92.54. To see prices below 92.54, breaks must occur at 95.91, 94.22 and 93.59. The 1 year is oversold and targets 97.55. The 2 year average at 86.53 is almost exactly middle range and doesn’t threaten a break anytime soon buts its target is located at 93.53. Both the 1 and 2 year averages have ability to take DXY higher quite easily but the 10 year extreme price is found at 98.93. As long as 92.54 holds and the Fed is on track to raise, DXY longs remains the preferred way as well as any buy dip strategy. A break below 89.16 changes longs to shorts as a new downward distribution would begin.
Next points above are found at 96.36, 96.61, 96.74, 97.52, 97.88, 98.04, 98.75, then the 10 year extreme at 98.93. Below 95.91, 95.49, 95.16, 94.22, 94.11,
Brian Twomey Inside the Currency Market, btwomey.com