Key financial markets have become awash with volatility and uncertainty in recent weeks. The dollar bull run has been spectacularly ended by a huge correction since mid-April. It would seem that removing the word “patience” has had a significant impact and it would appear not for the benefit of the dollar as traders have taken profits on their long dollar positions.
There have been some huge long term dollar bull trends that have been broken by this move. However, broken trends do not necessarily mean big reversals. They can just mean that markets develop into choppy ranging conditions, beset with false signals and a lack of conviction.
EUR/USD – Bear trend may be over, but the bulls have lost their appetite. The sequence of lower highs and lower lows has been broken. There is also the base pattern that was compelted above $1.1050 which implies $1.1580. The problem is that this is not a bull market move (the euro continues to trade below the falling 144 day moving average which is at $1.1540) and hence why the euro has struggled to reach its recovery target. The 55 day moving average is a key indicator here, having been hit a couple of times during the big sell-off, it has now flattened off at just above $1.0900.
The ferocity of the correction i the past few days suggests a lack of support for the recovery and now a breach of the key reaction low at $1.1130 the counter trend is over. I now expect to see further choppy trading possibly back to trade around the 55 day moving average again. However, it would seem as though the erstwhile dollar bull trade has been replaced by ranging conditions.
Gold – Downtrend has been replaced by a broad sideways range. This is another dollar trade (with a negative correlation between the gold price and the strengtrh of the dollar) that has lost ists trend. Since Q4 2012 the price has beentrending lower. However, the moving averages are a tell-tale sign here, all basically flat and failing to show any sign of consistent trending direction at all during 2015.
The 144 day moving average has previously been a strong gague for gold but this is no longer the case, and that is because moving averages lose their effectiveness in sideways conditions. The price has been stuck in a range now broadly between $1150/$1300 for over 8 months. Once again the former long dollar trade has been replaced by a marke that is more rangebound.
Other markets lacking a real trend include USD/JPY, AUD/USD and USD/CHF. The yen has basically been trading sideqays for 6 months now; the Aussie has been in a basing process since February, whilst since the SNB removed the ceiling of the Swiss franc against the euro, the wild fluctuations have provided very little overall direction. All of these trades have seen their sustantial dollar bull run moves replaced by markets that are anow unable to retain a consistent trend.
It would appear as though the US Dollar bull run is over, however this has just been replaced by a lack of certainty and ranging market conditions. As the market and the Fed flip-flops throughout 2015 amidst a sequence of positive and negative data surprises in the US, the choppy markets will continue.
However when the time comes for a US rate hike (now expected to be late in Q4) will there actually be any discernible trend forming? The timig of the rate hike will create near term volatility, but give or take a month or two the market is fairly well prepared for the event. That is why we are now facing these ranging market conditions now. Tell us something we don’t know and we might get some trending markets once more.
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