The prolonged correction of the dollar as the rebound in equities has finally begun
The dollar correction continued last week and resulted in the worst performance. The late rebound in equities and the prolonged correction in Treasury yields are both weighing on the greenback. The yen followed as the second weakest, mainly on risk sentiment.
On the other hand, Kiwi was the best performer, further supported by the RBNZ’s hawkish rate hike, which indicated that interest may peak higher than expected. The euro was lifted by repeated comments from ECB officials who affirmed the possibility of a rate hike in July. The Swiss franc was also strong on the prospect that the SNB would follow the ECB, should the latter exit negative rates.
Looking ahead, there is plenty of room for the late rebound in equities to continue. The development would likely give commodity currencies an advantage, even over European majors.
Did the DOW and S&P 500 end their corrections with a strong rebound?
The anticipated rebound in oversold stocks finally happened last week. Current developments indicate that the corrective DOW drop from 36952.62 ended in three waves to 30635.75, just before the 38.2% retracement from 18213.65 to 36952.65 at 29794.35. The immediate focus will be on the 55 wee EMA (now at 33792.10). A sustained break will confirm this bullish case and bring further upside to the 35492.22/36952.65 resistance area. However, the 55 week EMA rejection would likely extend the entire decline from 36952.65 with another leg down.
Similarly, the S&P 500 could also have completed the correction from 4818.62, with three waves to 3810.32, after hitting a 38.2% retracement from 2191.86 to 4818.62 at 3815, 20. The sustained break of the 55-week EMA (now at 4288.07) will bring a stronger upside back to the 4637.30/4818.62 resistance zone. But the rejection by the 55 week EMA will keep the short term risk on the downside for a further dip through 3810.32.
10-year yield further extends correction from 3.167
The 10-year yield continued the corrective trend from 3.167 with another decline. The outlook is unchanged and a further decline could still be observed. But the decline should be contained by a 38.2% retracement from 1.682 to 3.167 at 2.599, which is close to the 55-day EMA at (now at 2.652) to provide a bounce. There is little chance of breaking through the key long-term resistance at 3.248 at this time. But the sideways trade range should be above 2.6.
Dollar index extends correction from 105.00, more downside
The Dollar Index also extended its correction from 105.00, on improving risk sentiment and falling Treasury yields. It should now correct all the upside from 89.53 to 105.00. A deeper decline is in short-term favor of the 55-day EMA (now at 101.26) and below. But the decline should be contained by a 38.2% retracement from 89.53 to 105.00 to 99.09 to bring a bounce.
On the upside, minor resistance above 102.65 will bring an earlier bounce. But even then, the resumption of the long-term uptrend should only occur at a later stage, after a deeper or longer corrective phase.
AUD and CAD will benefit from improving risk sentiment
Given the improved risk sentiment, there is further upside prospect for commodity currencies. The performance of the AUD/JPY was a bit disappointing as it still remains below the minor resistance at 91.15. But a break up could be due. Outlook unchanged, corrective fall from 95.73 ended with three waves at 87.28 before medium term resistance at 86.24 turned support. A firm break of the 91.15 resistance should confirm this bullish view and bring a stronger upside to the 94.40/95.73 resistance area.
EUR/CAD consolidation pattern from 1.3383 may also have ended with three waves to 1.3806, before a 38.2% retracement from 1.4633 to 1.3383 to 1 .3861, and well below 1.4162, support has turned into resistance. A sustained trade below the 4:55 EMA (now at 1.3632) will confirm this bearish case and bring a retest of 1.3383. The breakout will resume a medium-term downtrend.
USD/CHF Weekly Outlook
The correction in USD/CHF from 1.0063 extended lower last week despite the loss of bearish momentum. Further decline is still in favor this week. But the decline should be contained by a 61.8% retracement at 0.9525 to bring a bounce. On the upside, minor resistance above 0.9763 will bring the upside bias back for recovery. However, a sustained break of 0.9525 will lead to a deeper decline to the support at 0.9193.
Overall the downtrend from 1.0342 (2016 high) should have already ended with three waves down to 0.8756 (2021 low). The rise from 0.8756 is likely a medium term uptrend in itself. The next target is the resistance zone 1.0237/0342. This will remain the preferred case as long as the resistance at 0.9471 becomes support. However, a sustained break of 0.9471 will extend long-term trading with another leg down.
In the longer term, the current pattern indicates that the correction from 1.0342 (2016 high) has already ended at 0.8756 (2020 low). The upside from 0.7065 (2011 low) may be ready to resume. The firm break of 1.0342 will confirm and target a 38.2% retracement from 1.8305 (2000 high) to 0.7065 at 1.1359.