In the first quarter, the dollar showed good growth, but in April its fuse dried up. Now everyone, from economists to investors, is waiting for a further decline in the American currency. Economists polled by Bloomberg predict that the dollar will fall in value against 11 out of 16 major currencies in the next 12 months. The same opinion is shared by the options market participants, where over the past month the US currency put options have risen in price against similar call options. In addition, the bearish sentiment for the dollar dominates among investors surveyed by Bloomberg.
What currencies would the dollar be best sold against? Nikolay Dudchenko, an independent financial analyst, answered a question from Fortrader magazine.
– Perhaps one of the key reasons for the dollar’s decline has now become the acceleration of inflation in the United States (CPI in March in annual terms increased by 0.6%, PPI added 1%). It is even necessary to say a little differently: the acceleration of inflation, while not accompanied by statements by the FRS about the need to tighten monetary policy. Those. the market simply did not find reasons for the growth of the dollar rate in April. Moreover, in the Eurozone, firstly, the situation with the coronavirus has begun to improve somewhat, and, secondly, the ECB is beginning to curtail the QE program.
Is it possible now to clap your hands and shout that everything is lost for the dollar? It seems to me early. The rise in inflation should inevitably lead to a reaction from the regulator and, as we have already noted, now it will be enough just verbal interventions to turn the American currency. Therefore, now I would not directly actively sell the dollar, and would rather consider the current movement in the majors only as a correctional one. Note that the key word here is ‘bye’ because, as always, you only need to act according to the situation.
Technical analysis of the dollar
Let us now understand the technical picture. Consider the technical behavior of the major currency pairs in the long term (1 month).
EUR / USD
In our previous EUR / USD review, we considered the daily time frame. Our forecast for the price movement range was 1.1750 – 1.2130. The target was called around 1.1600. But, as we saw, there was a reversal from the level of 1.1700 – below this mark the EUR could not go down. There was a return above the 200th moving average again. On the monthly time frame, it is retested with the formation of a bullish flag and the possibility of reaching the level of 1.2550.
It seems to me that the opening of long positions in the pair is still premature, at least until the exit from the “flag” pattern, ie. breakdown of the level of 1.2350.
The delta of one-month put options with a strike of 1.2200 is 0.72.
GBP / USD
The reversal in the British currency occurred at around 1.3670 (our previous forecast was a range of 1.3565 – 1.3585).
As we already noted, the moving average continues to rise in the daily range, so the trend remains bullish. However, on a monthly time frame, the price is still below its 200th moving average (1.4740), which means that it is too early to be too happy for the bulls. If the growth continues, one of the main targets will become the level of 1.4380. The intermediate target is naturally at 1.4000.
Delta of 1-month put options with a strike of 1.4000 is 0.64
AUD / USD
Alas, the Head & Shoulders pattern in the AUD / USD pair, which we talked about a month ago, has not been completely completed. The price continued to rise, but the target in the form of the 200th moving average (0.7400) was not reached. However, on the older monthly time frame, the price is only now testing its moving average (0.7875 mark). So, it’s definitely too early to buy. Rather, it is logical to expect a downward correction before the new bulls attack.
Delta Put for options with a strike of 0.7875 is 0.7.
USD / CAD
We were not mistaken in the USD / CAD pair. In our previous review, we talked about the fact that the pair has every chance to continue moving down, which is what happened. We waited for a reversal only after the 1.2600 breakout, but the breakout did not take place, and the bearish trend continued.
Here you should also pay attention to the long-term monthly time frame. The price is testing the 200th moving average (1.2400), and it is still a very big question whether the bears will manage to maintain this advantage. In short, it is too early to sell the US dollar.
NZD / USD
The NZD / USD pair fell slightly short of our target of 0.6900. The reversal occurred from the 0.6940 level. The monthly growth target is at 0.7560. As with EUR / USD, we are observing the formation of a bullish flag and a signal for continued growth will be the exit from this flag.
Conclusions: in almost all “majors”, selling the dollar now seems to be a rather risky business. The most serious chances for a reversal and correction are now in the AUD / USD, USD / CAD and EUR / USD pairs.