Somewhat disconcerting for dollar bulls, however, was the big reversal we saw play out over the course of the trading session yesterday. Not only did the buck finish well below its high point of the day, but it also closed lower than both the open and close of the previous two sessions.
Look at the candlestick chart of the U.S. dollar index below to help understand this:
The three-bar pattern I’ve circled does not represent an official bearish reversal pattern – at least as far as general candlestick analysis goes. But the engulfing nature and timing of the third bar in that pattern is cause for attention.
Yesterday’s session alone showed a big time loss for dollar buyers. The sellers emerged strongest on the day. The buyers couldn’t hold the new highs. And they couldn’t hold the highs, closes or even the opens of the two prior sessions either. The sellers dominated the trading day.
This morning, on the other hand, the U.S. dollar is bouncing back relatively quickly. This strength isn’t entirely out of the ordinary, but it’s somewhat surprising considering the overly bearish session yesterday. Why haven’t traders running from the U.S. dollar?Why Aren’t Traders Running from the Buck?
Could be a lot of reasons ... really.
Could be the fact that currency traders are reacting to the risk environment (i.e. stocks are lower and thus pushing up the U.S. dollar).
It could be the fact that the Bank of England and European Central Bank reminded traders that global central banks are converging on Federal Reserve interest rates (i.e. BOE cut to a record low of 0.5%; ECB to 1.5%). It could be that the world is being pressured to “Go Green!”
But on top of all those things, there may have been a clue that today wouldn’t be destined to follow yesterday’s bearish footprints.
After yesterday, when price action was hinting at reversal, a colleague sent us a summary of yesterday’s FX at-the-market options’ volatilities.
Options Reveal Volatility is Off for the Yen and Pound
He noted that 1-month volatility on the yen was off more than 1%. Volatility on the British pound, too, was off more than 1%. Each of those weighs heavily in the U.S. dollar index basket of currencies.
It’s common belief that trend reversals typically coincide with periods of high volume. A chart of the euro, below, reflects one such instance...
This Spike in the Euro Coincided with a High Volume Day
But with volatilities LOW yesterday, and with the rebound the dollar is putting in today, it appears this possible trend reversal will need to be put on ice for now. This may be something to keep an eye on though should volumes shoot sharply higher without the U.S. dollar index surpassing yesterday’s highs.
Until then, I guess we turn to what’s making headlines...
The Bank of England just dropped to 0.5% on its benchmark lending rate today ... plus announcing they’re taking all kinds of other economy-saving initiatives.
The European Central Bank slashed another 50 basis points off of their benchmark this morning. And the thing is, European officials keep trying to take a tough stance on easy-money policy but they keep on giving in.
The Bank of Canada also lopped off 50 basis points from their benchmark on Tuesday. Their benchmark lending rate now sits with the BOE benchmark and the Swiss National Bank benchmark at 0.5%.
While the Reserve Bank of Australia left rates unchanged this week, Australia “surprised” the markets when they revealed their first GDP contraction in eight years.