On Wednesday, the December Canadian Dollar soared after the Bank of Canada and other major central banks made a coordinated move to flood the Forex markets with liquidity. It may have been a pre-emptive strike to avoid a major bank failure, but the consensus is that European banks were suffering from massive cash outflows and quite frankly they just needed the money. Even though this was a coordinated global effort, the Fed played a major role in making sure the world had enough U.S. Dollars.
Another reason for the timing of this move could be that the European Central Bank felt overwhelmed by the massive amount of sovereign debt it would have to cover should several countries default at the same time. At this time the resources of the ECB are being taxed because of its purchases of Spanish and Italian debt. If it had continued on this course of buying up sovereign debt, it probably would’ve ended up as the lender of last resort which is something it wants to avoid being.
Based on the size of the rallies in the foreign currency, commodity and equity markets, it looks as if the central banks’ move restored some confidence to the financial markets. Despite the rally, the consensus among traders is that this is a short-term solution that gives the politicians and finance ministers time to work out more sophisticated longer-term solutions. How long the euphoria lasts has yet to be determined. Overnight there was very little movement in the foreign currency and equity markets. Traders may have had time to crunch the numbers and may have concluded that the move was enough to change the playing field, but not enough to change the trend.
Yesterday’s rallies may have been enough to buy some time, but trading theory says there has to be a retracement since a major portion of the rally was triggered by short-covering rather than fresh buying. There has to be a pull-back to allow the value-based buyers in the market. Given the huge amount of negative news at this time and the strength of the downtrends, it’s hard to believe that anyone would want to pay up for currencies or stocks. In my opinion, the traders that were caught short on Wednesday, after licking their wounds are likely to come back with a vengeance on the first sign of bad news.
Daily December Canadian Dollar Pattern, Price & Time Chart
Technically, the December Canadian Dollar is still in a down trend despite the current 4-day rally. As long as the market maintains its lower-top, lower-bottom formation, all of the rallies are going to be considered corrective in nature. Based on the 1.0097 to .9497 main range, the 50 percent to 61.8 percent retracement zone at .9797 to .9868 respectively is the current resistance. A downtrending Gann angle at .9847 is also a resistance point, making .9847 to .9868 a major resistance cluster to overcome if this market is going to continue to move higher.
From a support perspective, the single currency is trying to overcome a steep uptrending Gann angle at .9817. If the market can regain this angle and hold above it then consider this to be a sign of strength. If this can’t be accomplished then look for a possible retracement to .9657.
The key to today’s action is the follow-through rally. If traders don’t take the financial markets sharply higher today then yesterday’s action was just a shot of insulin. In other words, it is going to have to be replenished soon. If this was a pre-emptive strike against a future bad event then expect to see the bad news shortly. It may be a French bank downgrade or even rumors of a Euro Zone breakup. The bottom line is something has happened or is happening that made the Fed take the money from the U.S. piggy-bank and put it into Europe. It has to be something monumental. I don’t think it was done as a show of power or to allow the central banks’ to flex their muscles.
