US Dollar Showing Signs of Reversal

Thursday, 28 October 2010

The USD fall could be coming to an end, if the current trends and indicators in the currency markets are anything to go by. Recently, we have seen a lot of evidence suggesting that the USD could be coming to the end of its long term down trend - and might in fact be setting itself up for more than a small correction to the upside.

Admittedly, each time we have called the bottom of the USD down trend, we have been wrong. However - even if the low has not yet been set, we believe that it is not far off reaching the peak.

Why? Because a number of economic and technical indicators suggest that the USD might not be able to sustain such a level of weakness for very much longer. In other words - many people think that the USD is undervalued against most of the major currencies - and therefore believe that there is very little strength left in the down trend.

On the volatility front, FX options markets are currently facing increased volatility, which could lend a hand to those who believe that the trend is coming to an end. Usually, when a reversal is imminent, the volatility in a market spikes as a result of the sideways trading which takes place before the actual trend reversal begins and takes hold.

In our opinion, the major perpetrator of a reversal in the USD will come in the form of the EUR/USD. Interestingly, the fundamentals in both of these areas (Eurozone and America) are relatively on par, and therefore changes in one will have a tangible effect on the actual pairing of the currency.

Thus, we think that when the USD up trend does begin, it will first be indicated by a drop in the EUR/USD - and this will be the first sign that more is to come in the way of USD strength in other currencies.

But which other currencies could be set to gain from a stronger USD? Well - the NZD/USD is one of the most likely to fall, followed by the AUD/USD and of course the GBP/USD. All of these currency pairs are majorly affected by the trends in the USD index, and therefore we would expect these to be the next to respond as a result of trader's changing ideals about the benchmark US currency.