The U.S. dollar affects many other markets, and signs of continued strength should be closely watched, no matter what market you trade. U.S. dollar rallied after the release of the March employment report on Friday, April 2, which showed the best job growth in three years. I think further gains are ahead for the dollar, as rising interest rates at both ends of the yield curve are only a matter of time.

The ICE June Dollar Index futures contract showed some consolidation after the employment-report-driven surge, but I think there is more upside ahead for the dollar. The economic climate in Europe is far from sunny, and confidence has been shaken. Greece’s budget deficit issues still have not been resolved. The Dollar Index represents the dollar’s standing against six different currencies, but is weighted most heavily against the euro currency, so I’d also recommend selling the euro futures.

The U.S. seems to be a step ahead in an economic recovery, lending market participants to speculate higher interest rates in the U.S. are likely to come sooner than in the Eurozone. As far as the technical picture for the Dollar Index futures, support looks to close to the trendline at 80.60, also near the 50-day moving average. I would be a buyer at these current levels, with a stop just below the trendline. A close below the trendline could see the June contract pull back below 80. But if you don’t want to buy at current levels, that might also be a place to consider. If we see Treasury prices break to the downside, the dollar could test the March 25 high at 82.52. Right now, the U.S. is the currency of choice, along with the Canadian dollar and Australian dollar.

U.S. Dollar Index June Futures

The Canadian dollar and Australian dollar likewise also look bullish. These economies are commodity-driven and buoyed by an increase in investors’ appetite for risk in the past few months. Canada benefits from its oil exports, and investment flows have really favored crude oil this year. The Canadian dollar has recently hit parity with the U.S. dollar, and I think it should continue to gain as a global currency. There is room to move to $1.0250 in the June contract.

The Australian dollar also has garnered support from hawkish comments from the Reserve Bank of Australia. Its governor warned it would not be wise to leave interest rates at “rock bottom” for longer than necessary, spurring rate hike speculation.

Commodities
Crude oil made a breakout to the upside Monday, April 5, rising above $87 a barrel to hit a 17-month high. The market could come back down a bit and retest $85, but I think that’s a good value area to buy.

Gold has been sensitive to currency movements, and has stalled between the area of $1,130 – $1,150 per ounce. You can see a wedge forming on the chart of gold futures. Gold seems to rise reluctantly without much conviction. At these levels, I’m not terribly bullish, and recommend traders consider selling June 1175 calls. You might look to sell puts on a move to down to $1,100. Gold might test $1,140 on the upside if momentum builds, but I think it’s more likely gold will fail and move back toward $1,100.

Gold is the most sensitive to movements in the dollar, so when the dollar pauses, it allows gold to move up a bit. Crude oil does correct a bit when the dollar moves up, but it seems to have a mind of its own lately and has decoupled from the dollar. Grains also have their own fundamentals independent of the dollar, as they are dealing with huge supplies. If we get a drought during the North American growing season, it would also completely change the game for grains.

June Gold Futures

June Crude Oil Futures

Treasuries
The Treasury market has been having a tough time so far in April. The June 30-year Treasury bond futures contract closed below an old low of 114-15, as yields have been on the rise. We have three Treasury auctions this week: the 3-year notes on Tuesday, 10-year notes on Wednesday, and 30-year bonds on Thursday. The market is waking up to all the supply coming into the market, pushing yields up and prices down. Higher rates are bullish for the U.S. dollar, and I think the Fed will have to raise rates at some point this year. According to a Bloomberg survey, of the 18 primary dealers that serve as counterparties to the Fed in open market operations, 10 are forecasting an increase in the Fed’s short-term target interest rate by year-end.

The last Treasury auctions on March 23-25 didn’t go so well, and the market sold off. So watch this week’s auctions for direction. If the 10-year note breaks through 4 percent, it could easily test 4.25 percent, which is about 113-20 in June futures prices.

Feel free to contact me with any questions you might have about the markets, and to develop trading strategies appropriate to your unique situation.

Carol Hurley is a Senior Market Strategist and can be reached at 866-261-0551 or via email at churley@lind-waldock.com.

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