Traders Are Heavily Short the US Dollar. Perhaps Too Short…

Traders are their most bearish on the US dollar since May 2011. Given this marked the low on the US dollar index, before it then rallied 42% over the next six years, we have to consider the potential that we have approached a sentient extreme and the dollar short thesis is an overcrowded trade. Of course, we need price action to confirm, but traders should err on the side of caution on betting big on a weaker dollar form here.

The rise in coronavirus cases in China weighed on oil prices on Friday, dragging the Canadian dollar down with it. CAD was the weakest major by Friday’s close, WTI (WTI) fell to a 2-week low before revering slightly by Fridays close. US indices traded slightly lower as investors booked profit just off all-time highs, but the sell-off was not severe enough to cause alarm.

After falling to 28,700, bitcoin (BTCUSD) recovered from its lows to close back above 33,000 on Friday. It’s now opened slightly lower around 32,270 and its next directional move remains ambiguous. Ethereum (ETHUSD) on the other hand has gapped higher over the weekend and is on track to break to fresh highs.

Today’s Calendar Events (Times are GMT+11 Sydney)

No major economic news is scheduled for today.

AUD/JPY: Trendline Could Prove to be Pivotal

AUD/JPY remains within an established uptrend, although recent price action appears to be corrective. At this stage, it is too early to tell if the correction from the 80.91 high completed at 79.50, or whether we could see new lows before the retracement is complete.

But this is where the bullish trendline comes into focus. Despite a false break of the trendline in December, price action has tested the trendline three times to confirm its significance. So now we wait to see whether bulls will use the trendline as a springboard to try and re-test the 80.91 highs, ow whether it will break to trigger a deeper correction.

• A break of the trendline brings the 79.50 low into focus for an initial bearish target.
• If bullish momentum returns, culls could focus on the monthly R1 pivot and 80.91 high.
• Should a bullish rally frail to test key resistance levels, we will be on the lookout for a new lower high to form and then seek a break of the trendline at a higher level.

CAD/JPY: Struggling at the Highs

CAD/JPY has tried (and failed) on several attempts to break above 81.90. Since March 2020 there have been several failed attempts to break this key level and, more recently, we have seen a bearish engulfing candle and bearish hammer / pinbar form to show supply at this level. Given its reluctance to break higher, we are monitoring price action for a break below the bullish trendline.

CAD/JPY has tried (and failed) on several attempts to break above 81.90. Since March 2020 there have been several failed attempts to break this key level and, more recently, we have seen a bearish engulfing candle and bearish hammer / pinbar form to show supply at this level. Given its reluctance to break higher, we are monitoring price action for a break below the bullish trendline.

Interestingly, if CAD/JPY does drop due to lower oil prices, it could help the bullish bias on AUD/CAD. Should oil prices return to their bullish trend and risk sentiment remain elevated, AUD/CAD could remain in a sideways movement (ad become less of interest to bulls and bears).

• A break below the trendline brings the 81.07 support level into focus for an initial target. Although some technical analysts would argue that price action could return to the base all the way down to 77.93.
• Whilst prices could cycle higher above the trendline, we would only have a bullish bias once it broke above 82.21 to new high, given the bearish reversal candles that have formed around these levels.

Brent (BRENT): Seeking the End of the Retracement

Oil prices were under pressure in the second half of last week, as rising coronavirus cases painted a bearish picture for oil demand. However, at this stage price action continues to look corrective, and the daily trend remains structurally bullish. Despite Friday’s sell-off, price action remains above the 20-day eMA, and we expect the 53.25 – 53.80 zone to provide solid support. Brent is therefore a potential candidate for bullish dup buyers. We just need volatility to subside and prices confirm a level of support nearby.

• The bias remains bullish above the 53.25 – 53.80 support zone. Next major resistance is 59.60.
• Bulls can seek bullish setups above around the 53.25 – 53.80 support zone. This could be a basing pattern on an intraday timeframe (inverted head and shoulders, double/triple bottom etc).
• Alternatively, bulls could wait for a break above the retracement line.
• A break below 53.25 brings the 50.55 low into focus for bears.