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EUR/USD: Why is the buck getting bludgeoned?

So much for a late summer weekend at the beach to help calm traders’ nerves.

The massive wave of risk-off trade from Friday has carried over into the new week, with global equities and most commodities tanking, bonds surging, and the greenback collapsing. One of these things is not like the other: the US dollar usually sees a safe-haven bid in times of crisis as traders rush to the perceived safety and stability of the world’s largest economy. So why is the buck getting bludgeoned?

The first thing to note is while the dollar is that though dollar index is changing hands in the 93.00s, near a 7-month low, it’s actually showing relative strength against emerging market and commodity currencies. In fact, the vast majority of the dollar selling is concentrated in just three currencies: the euro, yen, and Swiss franc. The key to unlocking the secret of the dollar’s weakness lies in understanding what these three currencies have in common, namely low/negative interest rates.

Up until last week, many traders were confident that the Federal Reserve would raise interest rates in its September monetary policy meeting, whereas the central banks in Europe, Japan, and Switzerland are all a year or longer from even considering normalizing their respective extraordinary monetary conditions. Not surprisingly, it became a consensus trade to sell the lower yielding currencies and buy the dollar in an attempt to front-run the Fed’s “inevitable” interest rate hike later this year. Now, the global market turmoil has forced all of these traders to run for the exits at the same time, driving the euro, yen, and Swiss franc each 3% higher against the dollar in just the past few days.

Technical View: EUR/USD

EUR/USD provides the cleanest example of this phenomenon. The pair has surged 500 pips in the last four trading days, and more importantly, has broken above both its 200-day moving average at 1.1330 and previous resistance at 1.1450. Not surprisingly, the MACD is trending higher above its signal line and the “0” level, showing strongly bullish momentum, though the RSI indicator is now in overbought territory.

With rates breaking out to a fresh 7-month high today, more upside is still favored in the immediate term. In fact, EUR/USD has little in the way of resistance until the 38.2% Fibonacci retracement of the entire 2014-2015 selloff at 1.1800, though the psychological 100-pip levels at 1.16 and 1.17 may also serve as near-term hurdles for bulls. Meanwhile, only a reversal back below the 1.1450 level and the 200-day MA at 1.1330 would shift the near-term bias back in favor of the bears.

 

Source: FOREX.com

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