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The correction on the greenback is not necessarily a trend correction because I don’t see that the U.S. Dollar Index on the daily time frame is in fact in an uptrend. Rather it’s BULLISH in its sentiment and momentum but has not organized into an uptrend. In fact I don’t believe the prior bearishness organized into a downtrend when prices sank from 80.00 down to the recent 77.12 low.

This first chart shows the Fibonacci Retracement and Extension levels I was watching when I was projecting where the move higher would run out of steam. Notice that it made a full (100%) Retracement and fell just nine ticks short of 80.81 level at the 127.2% Extension.

Now that the market has begun pulling back from the move higher, the question is “where is support?”. Consider that as prices were moving higher, the resistance levels were what was needed in terms of identifying a potential exhaustion level. This is why it’s so important to understand what pulling a Fibonacci Retracement and Extension from either an uptrend or from a downtrend will yield.

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Euro is above the 1.30 level against the US dollar in forex trading on the currency market today. Indeed, risk appetite has returned to the FX market, after the euro has had some disappointments recently.

Now the euro has bounced above a psychologically important level, and there are hopes that the Greek debt situation will soon be resolved, and that the eurozone will be able to move forward.

An EU embargo on Iranian oil hasn’t caused the euro to falter so far. However, there are some weaknesses that could result in a lower euro moving forward. The Greek deal is far from done, and there are other sovereign debt worries. Plus, unless the eurozone economy shows some solid improvement, the euro could easily sink lower. 

Forex options markets point to sharp Euro, US Dollar, and Swiss Franc moves in the week ahead. Traders should favor volatility-friendly breakout strategies until further notice.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

To gain a greater understanding of all six trading systems, view my presentation on SSI and the trading signals on our FXCM Digital Expo page.

Volatility expectations have jumped considerably and currently stand at a potential turning point. In the past several months we have highlighted the fact that 3-month expectations remain below a falling downtrend line. If we break higher, we could see currencies enter a new regime of high volatility expectations.

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In March, I wondered aloud about whether the New Zealand Dollar might be the most overvalued currency in the world. Since then, it has continued its unlikely ascent, rising 10% on a correlation-weighted basis and 3% against the US Dollar, hitting a 26-year high in the process. While there are signs that the New Zealand economy might be able to withstand an expensive currency, at some point, the chickens must come back to roost.

Surely the expensive kiwi must be wreaking havoc on the New Zealand dollar? “How is New Zealand supposed to rebalance its economy away from consumption, importing, borrowing and asset selling towards investment, production, exporting and asset buying when our currency is headed for record highs?” Wonders one commentator. In fact, exporters are coping just fine, and New Zealand just recorded its highest quarterly trade surplus on record. Never mind that this is due almost entirely to soaring prices for commodities and unflagging demand.

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The euro bounced a bit in forex trading on the currency market earlier, but is still weak against the U.S. dollar. Indeed, right now, the greenback is getting support in currency trading as commodities drop. High beta currencies like the euro are down, and commodity currencies like the Canadian dollar, are lower.

Euro is also weak as concerns about the sovereign debt issues in euro zone countries continues to draw eyes. Even though the situation in the U.S. might be seen as equally dire, there is a lot of focus on the situation in Europe.

Long term, many expect that the euro will rebound, but that remains to be seen. Speculation about the euro zone is running wild, with rumors about Greek debt restructuring, to the country pulling out of the currency union, to the dissolution of the euro altogether all part of the discussion. It remains to be seen what will happen.

Sometimes I wonder if I’m living in the clouds. All of my recent reports on the Canadian dollar were twinged with pessimism, and I argued that it would only be a matter of time before reality caught up with theory. While the continued surge in commodities prices has confounded everyone’s expectations, other economic trends continue to work against Canada. In other words, I think that there is still a strong argument to be made for shorting the loonie.

To be sure, the rally in commodities prices has been incredible- nearly 50% in less than a year! Oil prices are surging, gold prices just touched a record high, and a string of natural disasters have driven prices for agricultural staples to stratospheric levels. Given the perception of the Canadian dollar as a commodity currency, then, it’s no wonder that rising commodity prices have translated into a stronger currency.

As I’ve argued previously, rising commodities prices are basically an irrelevant – or even distracting – factor when it comes to analyzing the loonie.

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