USD index broke above its medium-term downtrend line

USD index has finally broken above its downtrend line last week. From Chart 1 below, we can see that USD index is in a bearish price channel (see the parallel pink lines, ABCD). Within this primary bearish price channel, a secondary bearish price channel can be also be drawn (see the parallel green lines, WXYZ). With the USD index having broken above the primary bearish price channel, we can conclude that a floor has been set for USD for now. Going forward, USD index is likely to go higher.


Chart 1: USD's daily chart as at Dec 8, 2009 (Source: Stockcharts.com)

I have appended below the daily chart of USD-RM (or, the exchange rate of USD1 to RM). This chart (Chart 2) shows the steady decline in USD-RM, which fits nicely into a price channel. USD-RM could rebound to the downtrend line at 3.45-46 (coinciding with the 100-day SMA line).


Chart 2: USD-RM's daily chart as at Dec 8, 2009 (Source: Yahoo Finance)

The near-term outlook for the USD has turned neutral & may even turned mildly bullish in the weeks ahead. A strong rally in USD could trigger USD "carry trade" unwinding- something similar to the Yen "carry trade" unwinding which happened in 2005 & 2007 (go here & here). While the USD "carry trade" unwinding is still a low probability event at this stage, we need to monitor this development closely.