Golden week for dollar but USD JPY bucks trend

It has been a very good week for the US dollar and a really bad one for the euro and Canadian dollar, among others. The rally has lifted the Dollar Index to its highest level since early February and possibly on course to 100. Investors are betting on a Federal Reserve rate hike in December and don’t anticipate there to be a shock win for Donald Trump – who is deemed dollar-negative – in the US Presidential election. At the same time, central banks elsewhere have turned or remained more dovish, not least the European Central Bank. The ECB’s President Mario Draghi confirmed that talk of tapering QE early was a load of rubbish and that the stimulus programme could be extended beyond the March 2017 end date if needed. Elsewhere, the Canadian dollar slumped this week after the Bank of Canada’s Governor revealed that the central bank was close to cutting interest rates in midweek, which came as a surprise to the market. The USD/CAD then extended its rally after inflation and retail sales data from Canada missed expectations on Friday. Meanwhile, the Swiss franc has followed the euro lower, which has lifted the USD/CHF pair for a time to its highest level since early March. The GBP/USD has remained largely out of favour, though it has held its own relatively well this week. Finally, the USD/JPY has had a mixed week and at the time of this writing it was trading more or less flat on the week.

So, the USD/JPY’s three-week winning streak was in danger of being halted. This is due above all to profit-taking from the longs and possibly also because of safe haven flows into the yen, which, if correct, bodes ill for the equity markets next week. As the week draws to a close, the unit was still consolidating below its technically-important 104.00-104.50 area, which had been both support and resistance in the past. While below here, the short-term bias remains moderately bearish. But the underlying trend may have turned bullish after the pair held its own on the higher time frames above the key 100-101 area, which as well as representing a psychological level (100) was also a significant support area in the past.  A key downward trend has now broken down and several resistance levels have been taken out, too. As such, we wouldn’t be surprised if the abovementioned 104.00-104.500 area also gives way in early next week. If the USD/JPY pushes onwards and upwards as we expect it might then the next bullish objective could either be at the 107.50 area – which represents the prior swing high – or at 107.60, where the 200-day moving average comes into play. At this stage, a closing break below short-term support at 102.80 is required to invalidate this short-term bullish outlook. Should that happen, then the support levels at 101.85, 101.25 and 100.00 would then become the next price objectives for the bears.