So much for the period of consolidation I was expecting last week. The USD surge has continued and the persistence of USD price gains remains as forceful as the early phase of the USD rebound. Price action continues to point to massive position liquidations, as USD pullbacks remain exceptionally shallow and new highs occur with little seeming relationship to data releases or other time-specific events. In simpler terms, asset managers are still looking to unload long EUR, GBP, AUD positions and ultimately get short those currencies, preferably on bounces in those pairs. When better levels to sell at fail to materialize, these funds are forced to go to market and sell into weakness at successively lower levels.
Many analysts are continuing to look for some slowing to the USD rally or some consolidation to develop and I fell into that trap last week. Instead of trying to anticipate a bottom in EUR/USD or a top in the USD, I'm going to operate on the basis of "I'll know it when I see it." And right now, I'm seeing very little in the way of signs of a USD top. The best that I can see are some doji patterns on daily candlesticks from Friday in the US dollar index and USD/JPY. But doji patterns (where the daily open is nearly identical to the daily close) are neutral and only potential warning signs of a reversal; traders need to wait for confirmation signaled by a daily close beyond the doji extreme point in the opposite direction of the trend. For example, in the USD index, the trend has been up, so a daily close below the low of the doji candle could confirm a reversal.
Key inter-market relationships continue to support the USD advance, which in turn reinforces some of those markets' moves. Oil prices are below the 200-day moving average at 111.51 and remain at risk of dropping below the $105/bbl level, setting up potential to take out the psychologically significant level of $100/bbl and decline further. Gold has dropped back below the daily Tenkan line (fastest moving line) in daily Ichimoku charts and is closing below the cloud on weekly Ichimoku charts, highlighting the prospect of more significant declines ahead. US Treasuries were bought on flight-to-quality desperation as asset managers dumped overseas assets and looked to park money in the most secure bond available. Also, this past week saw significant market talk that hedge funds were paring asset holdings in anticipation of large redemptions, a Street euphemism for withdrawals, for the September quarter end. It seems unlikely that such asset sales have already run their course in the first week of September and I would expect more to come.
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