In our most recent EUR/USD article, posted just before this month's release of Non-farm Payrolls jobs data on January 8th, we forecasted the extent and duration of an anticpated EUR/USD upward bounce off support, affirming that it would be just a temporary fade against the longer-term downward trend, and an ideal re-entry point, once oscillators became overbought, to resume the longer-term trend of U.S. dollar strength .

As you can see in the daily chart below, over the past couple weeks, this indeed happened, with the price now at a lower low (1.4120)  after crashing through the 200 day moving average, the major counterbalanced horizontal support near 1.42, and the lower Bollinger Band. We originally caught this entire trend of U.S. dollar strength from its infancy early back in December, riding on the back of USD/CHF first, and then hopping over to EUR/USD.

U.S. dollar strength will most likely still continue in the near term, but there are early indications it may be losing steam, possibly reverting back into a trading range.

Yesterday, U.S. stocks gave up most of their gains since November after President Obama proposed new limits on the amount and type of risk large financial institutions can undertake. The S&P 500 dropped over 2% on the highest volume since November 2008, a very bearish warning sign. Also, economic reports have been conflicting, and not to forget that January's U.S. jobs data was disapointing.

We will need to wait a little longer to see how the markets further digest these developments before establishing a more definitive conclusion on the future direction of the U.S. dollar relative to the euro. We will keep you updated. 

Ahead of Friday's U.S. Non-farm Payrolls, EUR/USD is currently trading at 1.4309. Long term EUR/USD outlook remains as a strong downward trend, as indicated by ADX staying well above 25 at 31.90, lead by -DMI. However, for the past couple weeks, EUR/USD has been taking a breather from its drop off its November 25th high of 1.5343, staying within a well-defined range of 1.4200 to 1.4480. It has found strong footing at major counterbalanced horizontal support near 1.4200, further backed by the upward sloping 200 day moving average currently at 1.4243. Trading of the EUR/USD is very likely to traverse back to the upper end of the range near 1.4480 or higher in the upcoming days. This may allow Stochastics and CCI to become more overbought so as to tempt more sellers, including those whom already took profits, to jump again on the back of the downward trend for a better price before it resumes further gains.  So unless Friday’s U.S. job data is majorly positive, then for the near-term, expect EUR/USD to remain trading somewhere within its range of 1.4200 to 1.4480 or higher, before eventually resuming the longer-term trend of U.S. Dollar strength.

In 2009, U.S. stock markets were able to rise despite a substantial fund flow headwind. It's hard to see how mere 'liquidity' could have driven the 2009 rally, as some skeptics claim. At least based on ICI data, U.S. equity fund flows were negative for the year.

Rather, the 2009 rally was probably more the result of sellers becoming unwilling to sell at lower price levels. While buying demand was diminishing, selling demand at lower price levels was probably drying up at an even faster rate. Thus prices had to rise in order to clear the market.

The combination of a rising market with negative fund flows is an encouraging sign for the future. Guess what could happen if fund flows significantly reverse and become a positive tailwind.

Read more at The Money Game.

Note the most recent weekly fund flow uptick:

Longer-term perspective:

Even longer term:

The recent series of articles on ResearchReloaded.com regarding the U.S. dollar and Swiss franc have accurately timed and forecasted the growing strength of the dollar. It all started as an expected bounce off short-term support just a couple days before the Dec 4th U.S. Non-Farm Payrolls (NFP), when price was still only at 0.9987. It then developed into a major break out upon the Dec 4th positive jobs data surprise, and is still now continuing to follow through with a strong trend, currently at a price of 1.0428. For the Swiss franc, this was a relatively large move in a short period of time. For example, if you had opened a single contract of the Swiss franc on the futures market (prefix SF on the CME), which requires an initial margin of under $4,000 (USD), then you would now be holding onto a net profit of $5,100.21.

Although we have specifically focused on U.S. dollar vs. Swiss franc tracked by the USD/CHF currency pair, the same dollar strength occurred accross the board within all the major currency pairs, including USD/JPY. However, the highest degree of correlation between any two currency pairs exists between USD/CHF and EUR/USD, with a consistent correlation of 97% - 99%, as highlighted in this article on currency correlations. 

This fact is made very apparent in the daily charts below, where EUR/USD appears to be an almost exact mirror image of USD/CHF. In fact, USD/CHF is commonly used as a leading indicator of EUR/USD, and vice versa. Therefore, you could have just as easily instead went short on EUR/USD, rather than long on USD/CHF, and produced a similar profit. The major advantage of EUR/USD over USD/CHF is its much higher liquidity and tighter spreads, which is not as critical for longer-term trades. However, the disadvantage in the spot fx market of shorting EUR/USD rather then going long on USD/CHF would have been paying the current Central Bank Rate differential of 0.75% to hold your position, whereas for USD/CHF it is 0%.

In the daily USD/CHF chart below, you can see that the upward trend of the dollar has continued. Technically speaking, the important developments that occurred were that ADX finally crossed above 25 into trend territory and is still steeply sloping up, strongly sustained by the blue +DMI still maintaining above ADX. Furthermore, for the first time since last March, the 20 day moving average crossed above the 50, such that now the 5, 10, 20 and 50 day moving averages are all aligned, indicating strong longer-term U.S. dollar bias. This trend is now definitively established, and although short-term retracements are possible, the longer-term outlook is still for U.S. dollar strength, with it most likely to make yet higher highs. The next level of significant horizontal resistance that USD/CHF is aiming for resides near 1.0600.

Also, this week's U.S gross domestic product and durable goods data for November should stimulate more volatility in the USD/CHF and EUR/USD pairs.