MORGAN STANLEY CHART OF THE WEEK: IS THE USD OVERSOLD?

MORGAN STANLEY CHART OF THE WEEK: IS THE USD OVERSOLD?

3 April 2016, 20:50
Vasilii Apostolidi
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The Fed’s broad trade weighted USD has declined over 4.5% from its peak on January 20, so we have two questions: whether the USD is now oversold against certain currencies and whether we want to short the USD, which currencies have lagged the recent move. Below we look at a few technical indicators across a spectrum of G10 and EM currencies.

Fed’s Broad USD Index: The USD is currently trading below its 50, 100 and 200 day moving averages. The current level around 119.40 is still 1.2% away from the 15-October-2015 low and 5.8% above the 15-May- 2015 low. In addition, the 61.8% retracement of the rally since May takes you to exactly to this October low. For this reason we expect only a small further decline in the USD.

Fed’s Broad USD Index: Longer term, the momentum in the USD means that it still trades far above the 100 and 200 week averages. More interestingly, the USD has fallen to its 50 week average. A similar constellation occurred in 1998-1999, which was followed by a further 13% appreciation in the USD, up to the peak of 130 in 2002.

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RSI: The RSI or relative strength index looks at the last 14 days of closing prices and measures whether there were more up days relative to down days. Usually an RSI below 30 is considered to be oversold. The USD vs ILS, PHP and MYR all fall into this camp, suggesting that investors looking to long these currencies should be cautious. Below 30 but less extreme are USDKRW, USDSEK and USDINR. On the other side, IDR, THB and HUF have all underperformed in the EM rally. Within G10, NZD and NOK have room to rally.


Relative to the USD low :The Fed’s broad USD index previously dipped in October 2015. We compare current spot rates to that low to find currencies that may have further room to go. On this measure, the currencies that have been bought the least vs the USD are ZAR, GBP, RUB and MXN. As with the RSI, MYR appears overbought relative to the USD. Within G10 AUD has rallied the most beyond the October level.

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