Tuesday, May 10, 2016

Dollar Bulls Few but Growing in Strength

Today, the dollar index (DXY) marks a 6th consecutive daily higher-high; a situation indiating some bullish momentum rather than overbought conditions.  Up over 2.65% since the week-ago low of 91.919, the dollar index is rising at a pace to reach 96.00 or higher within two weeks. 

Hedge funds are said to be short the dollar.  Their performance this year has not been stellar and it looks like bearish positioning in the dollar will not be helping.  Quieted global financial system conditions encouraged dollar selling as traders expressed diminished comfort from its safe haven status.  Reduced prospects for the Fed moving forward with policy rate hikes anytime soon further pressured dollar values. 

At this juncture however, the market is pricing very little chance for the Fed to move in either June or July (4% and 17% respectively) and only a modest (45%) chance by year-end.  Odds of a rate hike may not grow immediately from here, but there is little room for them to fall significantly over the coming weeks.  

Technically, DXY formed a ‘hammer bottom’ last Tuesday.  That day, the index penetrated the lower edge of a channel trend dating from late-March, but settled back within that channel.  Recovering price action broke the upward trend line of this channel on Friday.  The pace of advance over the last 6 days is consistent with other significant advancing price action seen since October of last year.  In all, the developing bullish trend is strengthening as it sheds excessive prior bearish sentiment.      

Resistance: 94.58; 95.12; 96.27
Support 93.78; 93.08 92.62  

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