Will Dollar Lows Hold? (Part 2)

12/14/2009 11:32 am EST

Focus: FOREX

Thomas Aspray

, Professional Trader & Analyst

In the first part of this article, we looked at the dollar index, as well as the dollar against the euro and British pound.  However, there are two currencies that have received as much attention in 2009: The Australian and Canadian dollars. The strength in the yen has also been noted as many are concerned about its impact on the Japanese economy. In this article, we’ll take a look at these three currency pairs.

Figure 1

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The Australian dollar had quite a slide in 2008, falling from a high at .9770 to a low just under .6000. It bottomed in October and then held well above the lows in early 2009. The move in the OBV above its downtrend and WMA, point 1, was a strong sign that the aussie had bottomed. (Click here for a chart.)

Even though the weekly uptrend in prices is being tested, line a, the OBV is still positive as it did confirm the most recent highs. It is still well above its uptrend, line b. This is not the case with the daily analysis as even though the Australian dollar made new highs in November, line c, the OBV formed lower highs as indicated by line e. The daily uptrend in the 90 area, line d, is now being tested, but the break of the uptrend in the OBV (line f) suggests that it will not hold. The next good support comes in the .8750 area, with the 38.2% support at .8200. With the weekly analysis positive and confirming the recent highs, a further correction should set up a buying opportunity.

Figure 2

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The outlook for the Canadian dollar futures is less clear. The double bottom was completed in the .7650 area in mid-March (click here for chart). After just a bit more than a 38.2% pullback in July, the Canadian dollar turned higher, testing the .9800 area in October. There is a heavy band of resistance between .9800 and 1.0200. The OBV has been acting stronger than prices, line a, since it made a new high early in the year. Even though the Canadian dollar has been basically flat for the past few weeks, the OBV has continued to move higher. The daily analysis is giving us a fairly different picture. While the futures were making higher highs, line b, the daily OBV failed to confirm these highs (line c) This weakness is supported by the break in the OBV’s uptrend, line e, in the past few days. The daily OBV has key support now at line d, and this is therefore the key level to watch. The Canadian dollar has first support at .9330 and the 38% fan line with more important support in the .9000 area. It would take a break below .8500 to change the long- term positive view of the dollar, and this does not look likely at this time.

Figure 3

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The dollar is also trying to bottom versus the yen, but clearly, the jury is still out as it needs to prove itself on the upside. The monthly RSI (not shown) has formed a positive divergence since early in 2009, but it has not been confirmed yet. This divergence is also evident on the weekly chart, as while the dollar has made lower lows versus the yen, line a, the RSI has formed higher lows, line d. The weekly RSI is above its WMA, but it is still declining. A move through the initial downtrend in the RSI, line c, would improve the technical outlook, but a move above the major RSI resistance at line b is needed to confirm a intermediate-term low. Initial support is now in the 85 area, and if we do see new lows over the next few weeks, they would not be confirmed by the RSI. There is key resistance now in the 91-92 area.

Clearly, from this analysis, the next few months may be pivotal for the dollar because while everyone is looking for the Fed to raise rates before the dollar can bottom, the technical picture suggests this may not be necessary.

By Tom Aspray, Trading Lessons editor, MoneyShow.com

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