Major Currencies at Crossroad

As we enter the U.S. holiday season the world’s most heavily traded currencies appear to be at a crossroad with all three at monthly structure. 

In Figure 1 we see the Weekly U.S. Dollar index chart, with price holding right at the confluence of it’s Monthly Directional line in maroon, and it’s Monthly bear trendline. The Dollar Index is also showing a higher low than the 2009 low.

Figure 1

EURUSD is showing a similar pattern, yet in the opposite direction in Figure 2. It’s currently below it’s Monthly directional line, in maroon, but holding above the Monthly trendline.  EURUSD is also showing a lower low and a lower high than where it traded in ’08 & ’09.    

Figure 2

After testing historic support at approx. 80.00 earlier USDJPY is still below it’s Monthly Directional Line in maroon, but above the Monthly Trendline on this weekly chart in Figure 3.  A reversal higher in this pair would likely mean that influential Japanese investors are buying into the global recovery theme, and starting to deploy investment funds overseas, unlike in 2009 & much of 2010 when they took a more “wait and see” approach following the U.S. economic stimulus. 

Figure 3

The big question from our standpoint becomes can the U.S. Dollar rally — reverse –without signaling a flight to quality, as it has in the past? And if the answer to that question is “maybe”, how will the current correlation between currencies and asset class markets shake out?

And then there is the other side of the coin: is this just going to prove another opportunity to get positoned in the same direction as the current existing long-term trends?  

Where prices are come month-end should provide some clarification.

Jay Norris is the author of  Mastering the Currency Market, McGraw-Hill, 2009 which is the text book for the intermediate level trading course offered though Trading-U.com see: Trading Courses  Jay’s second book Mastering Trade Selection and Management, McGraw-Hill will be in book stores in 2011.  

DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor.  Any charts shown here represent market conditions at a particular point in time. Such conditions may not be replicated in the future. Past performance is not indicative of future results.