After big overnight falls, the U.S. dollar managed to bounce back a little shortly after the New York open, the Dow was well over 100 points off its earlier lows and the VIX had declined more than 10% from its earlier highs. It wasn’t exactly risk-on, but the situation certainly looked a lot calmer than at the European open. The S&P 500 had completely eradicated the gap it had left behind after the closing bell on Friday at 2344. Thus, with the gap closed, the sellers may step back in after this bounce. With the dollar also testing significant long-term support levels, it was unclear whether the next move would be a much-needed bounce for the buck and stocks or if they would come under pressure again. Given that nothing has fundamentally changed since last week, I wouldn’t rule out the possibility of further losses for the stock markets.
Given this uncertainty, it may be best to take the U.S. dollar out of the equation and instead concentrate on a currency cross – for example, the Australian/New Zealand dollar (AUD/NZD) currency pair, which is fast approaching a key technical area. As can be seen, the area between 1.0740 and 1.0770 had been significant resistance since May 2016, until it was finally cleared earlier this month. Once resistance, it could turn into new support upon re-test. We are of the view that if the cross were to get there, a bounce to at least the first trouble area around 1.0860 could be the outcome, possibly higher. However, if support gives way then this month’s breakout could be considered a false move, in which case we could see a deeper retracement, perhaps towards the 200-day moving average at 1.0545 or horizontal support at 1.0520, before price decides on its next move.