The Hyerczyk Forex Report

With demand for higher risk assets declining, look for the break in NZD USD to begin to accelerate to the down side. This pair has had a spectacular run on very poor fundamentals. Longs may begin to sell out and take profits as many feel this market is way overbought.

Look for the bears to have a challenge between .6211 and .6122. The Main Trend turns down on a trade through .6151. This is the acceleration point where sell stops are likely to be hidden. Changing the trend to down will set up a further decline to the next major percentage retracement zone at .5741 to .5541.

The strong Dollar and less demand for higher-yielding assets have put the Australian Dollar in a position to challenge the last Main Bottom at .7828. A trade through this price will turn the Main Trend to down and could encourage more selling pressure. The first down side target is .7274.

As mentioned earlier, commodity markets were hit hard on Monday as the Dollar strengthened. The Australian Dollar and New Zealand Dollar broke on the news, but the Canadian Dollar suffered the most damage.

Lower crude oil and industrials metals had the biggest effect on the USD CAD. Once these commodity markets broke, traders covered shorts and may have entered the long side when this pair crossed 1.1290. Upside momentum may stall at 1.1419, but the charts are indicating that a rally back to 1.1922 is possible.

Many traders feel the USD CAD has dropped too far, too fast. In fact the Bank of Canada expressed its concerns about an expensive Canadian Dollar last week. It feels that a further rally will snuff out the current economic recovery by squelching demand for Canadian exports.

Look for the USD CAD to rally especially if speculators begin to side with the BoC .

The Euro turned its trend to down on a break through the last swing bottom at 1.3804. The charts are now indicating that 1.3610 to 1.3439 is the next downside target zone.

Lower commodity prices had a large effect on the Euro today. Weaker crude oil which had been bought as a hedge against inflation fell as the Dollar strengthened. Gold was also down. With the Euro, crude oil and gold all posting lower closes, traders sent a clear message that they wanted to be in the Dollar. This may be an indication that this current down move is going to be more than a short-term correction.

Although most of today’s weakness in the Euro has been attributed to a stronger Dollar, some feel that the Euro can break even further if speculators stop buying it. In other words, there are rallies in the Dollar when traders increase demand for it or when traders sell the Euro against it.

The European Central Bank hasn’t really come out and said it, but it is becoming concerned about the sharp rise in the Euro over a short-period of time. This is because one of its biggest fears is that Euros will get too expensive. This would hurt exports which is a major part of the Euro Zone economy.

There may be a retracement of today’s break over the next few days, but now that the trend has turned down, traders should wait until it reaches its minimum downside objective at 1.3602 before considering the long side.

Two overnight events sent the U.S. Dollar sharply higher on Monday. Firstly, the Group of Eight finance ministers hinted at an economic stimulus exit strategy and the Russians expressed confidence in the U.S. Dollar.

The Group of Eight finance ministers signaling an end to the economic stimulus plans was eventually going to happen. Signs of an economic recovery have been building for a couple of months. The ministers haven’t decided anything concrete at this time. This news is expected to serve as a message to others that exit strategies are being considered. They feel it is much better to announce an orderly exit rather than act haphazardly.

Russian Finance Minister Alexei Kudrin expressed confidence in the U.S. Dollar last night. This came after Russia and China had questioned the U.S. Dollar as the world’s currency. These comments reassured investors that it is too early to think of the Dollar as dead.

Forex traders responded to these news events by jumping into the Dollar. This put downside pressure on all of the currencies.

The U.S. Dollar finished Friday’s trading session higher in lack luster trading. Last week several Forex markets posted closing price reversals. The GBP USD and EUR USD posted closing price reversal tops while the USD CAD and USD CHF formed closing price reversal bottoms.

All of these patterns followed through to confirm the reversals but did not have the accelerations like the patterns suggested. On the other hand, this pattern usually indicates a 2 – 3 week counter-trend trade so there is still time to make full corrections. Another sign that the correction will follow-through to completion is the fact that none of the closing price reversal tops or bottoms were negated.

There are several issues causing confusion among traders at this time. The main issues dictating the direction of the Dollar are interest rates and inflation. This week’s auction drew higher yields which put down side pressure on the U.S. Dollar. Traders were driving the yields up because of the huge amount of Treasury supply hitting the market and over concerns the U.S. would not be able to finance its growing deficit.

Here is where the confusion comes in. At one time during the week, the Dollar actually rose on rumors the Fed would raise rates by the end of September. The thinking at that time was that higher yields would attract foreign buying. So what we saw this week was the Dollar falling because of higher yields and the Dollar rallying because of the threat of higher interest rates. This clearly indicates that investors are not certain which condition they prefer.

An announcement by Russia that it would cut its holdings of U.S. Treasury instruments triggered a flight-to-safety rally in the Dollar. This in a way was related to interest rates because less demand from Russia along with more supply from the Treasury would spike interest rates. By the end of the week, this event was hardly mentioned in the news. Based on the strength in the Dollar on Friday, however, it is possible that traders could be making an adjustment to reflect this action taking place in the future.

Higher crude oil prices had traders talking about inflation again. This news combined with additional debt issued by the Treasury raised trader confidence that inflation would surely show up at some time in the future. The gold market on the other hand did not reflect this scenario occurring at all. If selling pressure continues in the gold market next week, the U.S. Dollar is likely to surge. Depending on what the crude oil market does, the Dollar could have a spectacular week.

Euro and Canadian Dollar traders are facing other issues besides U.S. interest rates and inflation. The concern for investors regarding these two markets has to do with their rapid rise and its effect on exports. Both German and Canadian economies rely heavily on exporting goods and services to other countries.

Although it has not been specifically addressed by the European Central Bank and only in a statement by the Bank of Canada, the strong rise in these two markets could choke off demand for exports.

The strength in the USD CAD the past two days could be reflecting the fact that this may become an issue over the next few months if the Canadian Dollar is allowed to rally. A breakout to the upside through 1.1290 will change the Main Trend to up and would indicate the strong possibility of a rally to 1.1922.

The Euro Zone economy is in the same position as Canada. A break could be coming in the Euro because of the treat that a high price Euro could damage exports at a time when the economy needs growth to get out of the recession.

In summary, both technical and fundamental factors are indicating the Dollar could rally next week. Last week’s closing price reversals and subsequent confirmations are indicating that the Dollar has room to rally. Weakness in the gold market and the lack of inflation should also help the Dollar. In addition, the highly priced Euro and Canadian Dollar could feel pressure if traders decide these two prices are trading at levels which could hurt German and Canadian exports. If these markets do not break on their own then look for the central banks attempt to talk these two markets lower.

The desire for higher yielding assets led traders to buy the EUR USD on Thursday. Positive economic data and signs that the U.S. economy improved helped drive investors out of the safety of the Dollar.

Better U.S. economic data and the steady rise in crude oil prices should continue to encourage selling pressure against the Dollar. The only strength in the Dollar we saw this week was following the announcement that Russia would cut its purchases of U.S. Treasuries. Barring any surprises tomorrow, look for the uptrend to continue.

On the technical side, despite yesterday's weakness, the Euro could not follow-through to the downside and challenge the two Main Bottoms at 1.3804 and 1.3791. A trade through these two prices would have turned the Main Trend down.

The Main Trend remains up and by regaining the retracement zone at 1.4070 and 1.4133; this market is now in a bullish position to test the recent high at 1.4337.

Bearish traders will have to wait until this pair starts to show weakness again. Falling back below 1.4133 will be the first sign of weakness, followed by 1.4070. As long as this market remains inside of this retracement zone, it is still vulnerable to short-term corrections. The key to sustaining the rally will be regaining and holding above this zone.

Firmness in the metals complex and the strong uptrend in crude oil helped pressure the USD CAD on Thursday. Despite the strong influence from outside markets, comments from Bank of Canada Governor Mark Carney kept a floor on losses.

His primary concern is with the sharp rise in the Canadian Dollar over the past three months. The BoC is beginning to become concerned that the currency's rapid appreciation would "fully offset" any gains the Canadian economy has been experiencing.

Since the Canadian economy relies so heavily on exports, a strong Canadian Dollar may cause buyers to shy away from Canadian goods and seek cheaper prices elsewhere. This would affect the trade surplus, and hurt the economy's chances of pulling out of the current slowdown.

Looking at the charts, last week's closing price reversal bottom in the USD CAD remains intact and the possibility of a rally still exists as long as this market can hold the retracement zone at 1.1039 to 1.0980.

This zone represents the key retracement zone of the 1.0783 to 1.1290 range.

A failure to hold this zone as support should trigger a retest of the Main Bottom at 1.0783. If this market can gain support in this zone then look for the market to challenge the Main Top at 1.1290. A breakout through this level will turn the Main Trend to up for the first time since April 13.

The weaker Dollar and the strong demand for commodity-based currencies helped trigger rallies in the AUD USD and NZD USD. Additional support for the New Zealand Dollar came following the announcement by the Reserve Bank of New Zealand that interest rates would stay at 2.5%. This represented confidence by the RBNZ that the economy was in a position to recover from its current recession.

Fundamentally, news that Australia lost fewer jobs than forecast helped drive the Aussie higher in addition to the increase in trader appetite for risk.

Technically, the AUD USD is currently in a position to challenge the last Main Top at .8264 and the major Fibonacci retracement level at .8382. A trade through the Main Top will negate last week's closing price reversal top.

The current rally has helped form a new Main Trend Bottom at .7828. A trade through this level will turn the Main Trend to down.

Regaining a major 50% level at .7983 is helping to support this market. A close back under this level will indicate that the selling is greater than the buying at current levels.

Based on the daily swing chart, this market could trade as high as .8642 within the next 12 days.

Following a two-day setback, the U.S. Dollar regained strength as an announcement by Russia to cut its holdings of U.S. Treasuries spooked investors into the safe-haven Dollar.

The same announcement helped put in an early top in the equity markets and chased traders into lower risk assets.

The Treasury Bond market also fell hard as yields shot up as traders braced themselves for more supply and less demand for Treasuries in the future.

It may take a few days for the Forex markets to adjust to the Russian threat. In the meantime, volatility could pick up as a rally in the Dollar may catch many traders by surprise. After the huge drop in the Dollar, short positions have to be large. Today's trading action in the major currencies indicates that Dollar buyers may have already stepped in. A rally by the Dollar through Monday"s high may ignite the start of a massive short-covering rally.