Short-Term Dollar Risk Looks Limited

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By Jamie Saettele | Published 11/28/2006 | Currency | Unrated

Short-Term Dollar Risk Looks Limited

EUR/USD â�,�“ After spending 6 months trapped between 1.2976 and 1.2456, the EURUSD has broken out to the upside and hit 1.3161â�,�“ the highest price since March of 2005. The break above 1.2976 satisfies the minimum requirements for completion of the 5 wave pattern from the 11/15/2005 low at 1.1640. Wave 5 often equals wave 1 (or close to it). Wave 1 from 1.1640 to 1.2323 is 683 pips and wave 5 from 1.2483 to todayâ�,��"�s high at 1.3161 is 678 pips. Still, major tops are rarely without oscillator divergence. In other words, a top tick in price rarely occurs with the top tick in the oscillator. Such is the case now. Thus, a corrective move lower followed by a push through 1.3161 seems most probable. Major support is at the former range high of 1.2976.

USD/JPY â�,�“ The USDJPY looks the most constructive if one is looking to play a dollar bounce. The hourly chart shows a short term inverse head and shoulders pattern with price currently just below the neckline â�,�“ which is at 116.47. Resistance at 116.47 is reinforced by the 38.2% fibo of 118.46-115.37 at 116.55. A push through the 116.47/55 level targets the 50% fibo at 116.91. In addition, the point where the advance from 115.88 (wave C) would equal the advance from 115.37 to 116.39 (wave A) is at 115.91 (see the chart below for wave labels). The 61.8% fibo is at 117.27. In summary, 116.91-117.27 could be where the USDJPY downtrend continues.

GBP/USD â�,�“ Pound Sterling remains bid against the greenback as the pair has formed a possible short term double top at 1.9463/61. It takes a decline below 1.9304 in order to suggest that a deeper correction of this recent shot upward is in the works. A large wedge (diagonal triangle) has formed since the middle of May. These patterns often end in a thrust through the upper end of resistance before a reversal to the downside. It is not clear whether or not 1.9411 is a major top. A decline through 1.9144 would instill confidence that a top is in place. Unlike the EURUSD, the GBPUSD daily chart is accompanied by bearish divergence with RSI. The proximity of the 2004 high at 1.9548 limits upside risk (this would be the next bullish target).

USD/CHF â�,�“ The USDCHF has held above yesterdayâ�,��"�s low so far today, which is at 1.2023. A rally through yesterdayâ�,��"�s high at 1.2108 would suggest additional upside potential towards the 38.2% fibo of 1.2537-1.2023 at 1.2219. The next hurdle for bears is the 5/15 low at 1.1919. Hourly RSI is increasing and is just below 50. A rise through 50 would indicate that short term momentum is positive.

USD/CAD â�,�“ The USDCAD has retraced strength to the 61.8% fibo of 1.1177-1.1493 at 1.1298. The larger uptrend remains in place above the support line drawn off of the 9/1, 9/28 and 10/30 lows. The probability of a turn higher from current levels is improved by bullish divergence with RSI on the hourly at the recent low. Resistance going forward is at the 11/27 high at 1.1353 and the 11/23 high at 1.1426. A break below the aforementioned trendline negates the bullish stance and shifts focus to the 10/30 low at 1.1177.

AUD/USD â�,�“ Bearish divergence with daily oscillators at yesterdayâ�,��"�s high along with yesterdayâ�,��"�s long reverse hammer candle favors a decline from current levels. Resistance from the 5/11 high at .7791 has held on a daily closing basis as well. Yesterdayâ�,��"�s high at .7815 must hold as resistance if short term bearish potential is to remain intact. Support on the way down is at the 38.2% of .7614-.7815 at .7738 and the 61.8% at .7691.

NZD/USD â�,�“ Price remains stuck in a .6673-.6738 range and the NZDUSD is testing the upper end of that range today. It would take a daily close above .6750 to suggest additional upside potential. Support at the bottom of the range is reinforced by the confluence of the 10 and 20 day SMAs at 6676/79. The choppy trading since the end of September has led to the formation of a slightly upward sloping wedge â�,�“ which is a bearish pattern.

Jamie Saettele is a Technical Currency Analyst for FXCM.

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