Dollar Index to struggle during equity advance

The long-term fate of the dollar continues to perplex, recent analyst chatter arguing central banks need to make a permanent shift to a basket system more closely linked to trade patterns in the absence of any credible alternative to the dollar - the closest the market gets to consign the greenback to the dustbin. Looking at the dollar index on the daily chart there still looks little in the way of support, underlined by the slump we’ve seen this week – DXY down from just shy of 76.00 back to 74.31 at the time of writing.  From here there is some minor trend support at 74.08~ but really the June low at 73.506 is the first decent level.  Things look a little more constructive on the weekly chart but again we’re not that far from key support, 72.80 the line in the sand here.

The risk remains that we see another wave down which would take the dollar index to new lows (sub 70.00) and only a sustained break back above 76.35 would suggest that we can see anything more than a multi-day bounce.  The bad news is if this does occur it seems probable that our call for a sustained pick up in equity markets is wrong.  While trading opportunities are a little limited at this point in the range, shorts from 75.50 being our choice at the moment, we keep a close eye on how the chart develops as equity gains begin to slow.

Bears retain control of Nymex Crude sub $100

Nymex crude (CL1) has had a nice move up today with a 2.2% gain.  However this merely brings prices to the top of the current trading range and critically resistance at $96.11/$96.26 is still untroubled.  Any further headway towards these markers should see spec shorts tempted back, with the current bear trend needing a push through $97.10/30 to suggest we’ve seen a more damaging setback – and in turn shifting the s/t target to $100.  Below $100 downside targets remain the the real draw for the bigger accounts.


Indeed, we feel fading rallies in the $95.00-$100.00 zone offers good risk/return dynamics aiming ultimately for the mid $80.00’s.  A move back through $92.77/80 is the first objective and should see shorts begin to add to positions again, looking for a test and eventual break of the $89.60/70 June lows.  Once this area is cleared a push towards more important mid-term support, which lies at $83.34 (38.2% Fib of the Dec ‘08/May ’11 rally) and $83.85 (the Feb low) would be on the cards.

Developing S&P rally looks like it has legs

S&P500 has managed to string together a couple of good days and more importantly Tuesday's finish pushes the market through recent intra-day tops to leave us at the highest closing level since June 3rd (based on ES1). Equally interesting is how solid support now looks with that 200-DMA (@ 1,263) proving a very good floor which leaves us with attractive risk reward levels. Working from a long base and looking to add on any short-term dip mid range leaning on this marker on a closing basis (or perhaps an intra-day stop @ 1,257 if you're wanting to reverse if this zone breaks) looks sensible. 1,315 is the first target area on the topside and if this area can be cracked 1,350 would be the draw.


Given how US macro data has been printing you have to think a lot of bad news is now priced and assuming the Greeks can push their next (not last) fiscal plan through to keep bailout funds flowing another 'risk on' phase looks probable. Such an environment should really have the potential to attack the Bid Laden bounce highs (1,375ish) and potentially lift the market towards the 1,400/1,430 area over the rest of the summer. Given how things have been moving this probably rules out any extension of the dollar bounce from the early June low and favours plying EUR/USD from a long base again (entering sub 1.43).


We still like the Bund chart mid-term but it could also set back the bull move here where there is still a half point of P&L despite the 1pt pullback of the last two days on the table.

Greek debacle not quite terminal for the EUR

Fears the Greek debt crisis is snowballing out of control have hit asset markets in recent days, underlined most clearly on the currency side by the slide in EUR/USD from the 1.4697 high trade on June 7th back down to the 1.4100 area. But for the moment it doesn't appear to be a significant breakdown on the EUR chart with very solid support so far untroubled at 1.4000. In fact we'd probably need to see the 1.3770 and 1.3820~ area (200-DMA) fail to suggest that we're on for a more prolonged decline from here. Note at the onset of the European debt crisis this pair traded down to 1.1877. Being short prior to such a break risks leaving one exposed to politics - which ultimately the whole EUR project is. It's worth keeping an eye on the dollar index (DXY) - where the EUR obviously carries a significant weight - which looks slightly more constructive on the chart and would be better placed to benefit from any stabilisation/improvement in US data in the coming weeks while still offering exposure to the Greek tragedy/bearish EUR theme.

Bunds Advance Still Looks Robust

While many appear sceptical sub 3% Bund yields can be sustained looking at the Bund chart (generic RX1) the outlook is pretty robust with solid support now in place at 124.70/74 which should provide a platform to mount a march on towards the 50% Fib line at 127.32 and from there on towards 129.00+. Bulls should take further encouragement from the longer-term moving averages too with the mkt edging past the 200-day and the 55 crossing above the 100-day. Using weakness to accumulate looks sensible. Given ECB's policy bias curve trades should also work well, a bullish bias to the 2/10's currently around 142bps (based on generics). Historically this trade works well during tightening cycles.