Janet Yellen made her first public appearance as Fed's chair last week and testified to Congress. But, her pledge to continue with measured tapering provided no support to the greenback as it tumbled across the board. The Dollar index extended decline to as low as 80.07 and barely held on to 80 handle. In other markets, stocks extended recent rebound with Dow breaking through the 16000 handle decisively to close at 16154.39, comparing to historical high of 1588.25 made in December. S&P 500 is even closer to the historical high of 1850.84 and closed at 1838.63. Treasury yields continued to stay in corrective recovery and edged higher with 30 year yield closing at 3.700% and 10 year yield closing at 2.746%. Gold also jumped sharply through 1300 handle to close at 1318.9.
In the currency markets, Sterling jumped sharply and was the strongest currency last week as BoE inflation report hinted at rate hike in 2015. Commodity currencies were solid, with Aussie and Kiwi making gains on solid China trade data and return of risk appetite Dollar was the weakest currency, closely followed by Euro. Indeed, while risk sentiments were positive, The yen was only the third weakest major currency after dollar and euro.
The key development to note was the dollar's weakness in general. The EUR/USD took out a near term falling channel while suggests that the pull back from 1.3892 has completed at 1.3476 already. Focus is back to 1.3739 minor resistance this week and break will pave the way for at least a test on 1.3892 high. The USD/CHF looks set to take out 0.8903 decisively soon to extend the fall from 0.9156 towards 0.8799 low. The GBP/USD took the lead and surged through 1.6667 resistance. It reached the highest level in nearly three years and has just resumed the up trend from 1.4813. The USD/CAD extended recent pull back from 1.1223 and maintained mild near term bearishness. Despite employment data triggered pull back, and the AUD/USD held above 0.8906 support and maintained mild near term bullishness. The USD/JPY's recovery from 100.75 looks completed at 102.70 already and is possibly heading back to 100.61/75 key support zone.
Overall, the dollar's weakness is quite overwhelming in near term. Key levels to watch include 1.3739 in EUR/USD, 0.8903 in the USD/CHF, 10.43 in the USD/JPY and 0.9085 in the AUD/USD. Break of two or more of these levels would likely trigger more broad based selloff in the greenback.
Comparing European majors, sterling was clearly the strongest one. While the EUR/GBP is held above 0.8164 key support level after last week's steep fall, this support now looks rather vulnerable. The euro was even weaker than Swiss Franc as the EUR/CHF looks set to has a test on 1.2183 support this week.
Comparing European majors and commodity currencies, we saw that GBP/AUD drew support from 55 days EMA and bottomed at 1.8118 last week. The cross would likely rebound further for a test on 1.9185 high in near term. The EUR/AUD drew strong support from 1.5 handle and turned sideway last week. But near term bearishness is maintained with 1.5319 resistance staying intact.
Overall, the current development favors further upside in stocks and the S&P 500 could actually make a new record high this week. The Dollar and yen would stay pressured with the yen having a mild upper hand over dollar due to outlook in the USD/JPY. We'd favor selling dollar this week. Logically, the GBP/USD should be the choice as the up trend resumption was confirmed. However, the pair could firstly face some profit taking pressure on overbought condition in 4 hours RSI. Secondly, we're still cautious on strong support in 0.8164 in EUR/GBP to bring rebound, which could trigger a pull back in sterling elsewhere. Thus, we'd actually avoid buying GBP/USD first.
Instead, we'd prefer stay with our USD/CAD short and AUD/USD long strategy. Stop in the USD/CAD would be tightened up to 1.15, close to 1.1025 minor resistance, with target at 1.086, close to 55 days EMA. Stop in the AUD/CAD long will also be tight at 0.89 but we won't set a target yet, and would wait for a break of 0.9085 to decide. We'd judge the odds of buying the euro and Sterling again next week.