As we had observed in the past four weeks, that the equities markets continue to experience outflow despite the relief rally. This signaled that the rally is going to go out of steam soon and poised for a drop. A 3 month ATR chart showed that currently the S&P 500 (SPX) is in bearish divergence and a break below 4100 may see further drop to as far as 3900 (the 61.8% retracement of June low to August high).
Consequently, as the S&P 500 index has a positive correlation to the Dollar index, we expect DXY to resume its upward trajectory to a maximum of 108.50.
We expect the Dollar rally to be fueled by risk-off moves which means weakness in commodity currencies, in particular Loonie and Aussie. In such a scenario, we may see CAD/JPY resume its downward pressure and further rally in USD/CAD. AUD/USD might still see resilience from the support in gold, though last week closed with a bearish doji.
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