Published on 08/18/2006

In the daily currency technicals, the euro is headed lower before rally, the Japanese yen is king, the British pound continues its weakness, and the Swiss franc follows the euro.

Dollar Puts Up a Fight

EUR/USD - The EURUSD was rejected at the trendline that originates at the 1.3666 high (December 2004) - and the pair formed a reverse hammer on the daily yesterday. Still, the larger trend is bullish due to the higher swing lows from 1.2456. Only a break below 1.2693 would negate the bullish stance. More importantly, the decline from 1.2908 to 1.2693 is in a discernible 3 waves and the rally from 1.2693 to 1.2886 is in 5 - both instances favor bulls going forward. Although the larger trend is bullish, near term weakness is a possibility. The decline from 1.2886 to 1.2811 could be the first of 3 corrective waves and the push higher to 1.2844 could be the second corrective wave. Thus, look for a final leg down to test the confluence of the 61.8% fibo of 1.2693-1.2886 / A =C (1.2844 - (1.2886-1.2811) at 1.2767/69. Probability would then favor a resumption of the larger trend higher.

USD/JPY - We remarked yesterday that "the decline should be rapid and go to at least the 8/4 low at 113.95." We won't back away from that now, although there will certainly be corrections along the way. Yesterday, the pair topped out at the 61.8% fibo of 116.74-115.17 at 116.14. A continuation of weakness probes the 161.8% extension of 116.74-115.82 (from 116.37) at 114.87. The 8/10 low at 114.65 is just below as well. Daily MACD shows negative slope, RSI is below 50 (daily), and the pair is below the 20 day SMA - all confirming the larger bearish bias.

GBP/USD - Cable has fallen off and currently sits just above the 20 day SMA at 1.8850 (20 day SMA is at 1.8815). Downside risk from here looks limited due to negative divergence with oscillators on the hourly and the short term double bottom at 1.8825. A break below yesterday's low at 1.8820 probes the 38.2% fibo of 1.8176-1.9143 at 1.8775. A rally could see resistance at the 38.2% of 1.9023-1.8820 at 1.8898 or the confluence of the 10 day SMA / 61.8% of 1.8820-1.8898 at 1.8945/47.

USD/CHF - USDCHF looks just like the inverse of EURUSD (as it usually does). The pair has encountered support at the 78.6% fibo of 1.2191-1.2444 at 1.2246. Rising RSI on the hourly favors bulls in the short term. The terminus for a USDCHF corrective move higher could very well be at the confluence of the 78.6% of 1.2444-1.2236 / A = C (1.2292 + (1.2345-1.2236)) at 1.2399/1.2401. A rally to there could then give way to the larger trend down. A break below today's low at 1.2239 encounters potential support from the double bottom at 1.2191.

USD/CAD - USDCAD came close to touching the 61.8% fibo of 1.0927-1.1456 at 1.1130 yesterday, bottoming at 1.1140. Pair has rebounded in a choppy fashion to the 1.1200 figure. The larger picture is still bullish. The pair appears to be tracing out the 3rd wave of a correction from 1.1456. Where might this correction of strength end before strength buying returns? The 3rd corrective wave (beginning at 1.1319) would equal the first (1.1456-1.1170) at 1.1033. This is significant because the 78.6% fibo of 1.0927-1.1456 is at 1.1040 (just 7 pips away). This fits with the notion that initial moves at turning points are often retraced a large amount before a continuation. The initial move in this case is 1.0927-1.1456.

AUD/USD - As we have focused on in recent commentary, the longer term bias is a bearish one as evidenced by the bearish divergence with oscillators on the daily at recent highs and a resisting trendline from the 3/8 high at .7988. Immediate resistance is at the 38.2% fibo of .7699-.7588 at .7630. Hourly oscillators are rising from below 30 so a bounce higher to resistance is warranted. A break above .7699 probes the mentioned .7713. Targets for bears going forwards are the 8/9 low at .7563. A break below there exposes the 38.2% fibo of .7270-.7713 at .7544. (Also favoring bears is the close below the 20 day SMA yesterday). There is a trendline from .7270 at current price - a daily close below could lead to heavier selling.

NZD/USD - Kiwi broke above the trendline from.6443 yesterday but currently tests resistance from the 38.2% fibo of .7197-.5927 at .6412. RSI on the daily is just below 70 and the rally from .5927 is in 3 waves and thus corrective - meaning that the larger downtrend may soon continue. However, the point where the third wave (beginning at .6143) would equal the first (.5927-.6282) is .6498. This is 80 pips from current price. One final push higher before a resumption of the downtrend is one possible scenario. A push above .6498 probes the 50% fibo of .7197-.5927 at .6561. However, with extreme CCI on the daily (above 100) and RSI very near extreme, the likelihood of a sustained rally is not great. In addition, yesterday's inside day at the upper Bollinger band points to a potential change in trend.

Jamie Saettele is a Technical Currency Analyst for FXCM.