Friday’s action is bringing us a risk-off signal loud and clear. The carry trade (Yen versus CAD and AUD) is moving aggressively, gold and silver are off sharply, energies are lower and the equity markets are under significant pressure. Speaking of equity markets, I think they’ve taken their last gasp of air before going back under to new lows. The coming week doesn’t bring any major U.S. economic indicators, but next Friday will see the publication of stress test results for 91 European banks. This may be the biggest event of the summer and there’s no doubt in my mind it’s going to bring information overload. I suspect the initial response will be negative on that basis alone. Fasten your seatbelts. Things are going to get really bumpy! Let’s take a look at the currency markets.
U.S. Dollar
The past week showed the importance of trading with the trend as the dollar has declined pretty relentlessly. I felt things were getting a little overdone (even though the charts weren’t there yet), and that we might see a brief bounce. That simply didn’t happen. The moving averages, Relative Strength Index (RSI) and Moving Average Converence/Divergence (MACD) are still trending very firmly for the Dollar Index futures contract. Index levels themselves have stayed almost continually below the 10-day moving average.
Open interest has been declining steadily since early June, which suggests the action so far has been mostly long-liquidation rather than new short positions. Though I had been a week early in my prediction, the market is now approaching oversold RSI readings, currently just below 25. The MACD too is reaching an extreme, and 81 – 82 was a previous congestion point. So, I have to believe that the market is within 100 points of an interim low, but I’ve learned my lesson and won’t suggest bottom-picking this week. Additionally, if traders begin to take actual shorts, shown by a rise in open interest and a continued decline in the index, we could get a lot lower. Just watch and wait at this stage.
Euro Currency
In the euro, I have to admit I’m a little surprised at the levels we’re seeing. A long time ago, I gave the euro what I saw to be an outside chance of rebounding back to 1.2800, but I didn’t give it a very high probability at the time. Here we are, almost 200 points past that level. Fundamentally, I think traders reached a bad- news saturation point, not unlike what we had a year and a half ago in the U.S. dollar. Back on the charts though, the euro futures are now approaching the final Fibonacci retracement fan line that originates with the break below 1.3200 back in May of this year. This coincides with an RSI reading approaching overbought levels, and a peak in MACD.
Underneath all this, the trend is up. So, I have to take the same lesson learned with the dollar index and not short against the trend. However, I have to think that continued upside from current levels has to be very minimal.
Canadian Dollar
The Canadian dollar hasn’t made things any easier from a trading standpoint over the past week. Canada dollar futures fell short of the top end of the trading range at 0.9800. The RSI is neutral-negative at 47, the MACD is flat and the 10- and 20-day moving averages are separated by 20 points. Given the dollar’s inability to rally on reasonably bullish fundamentals, I suspect the near-term push will be lower toward 0.9450, but I can’t justify a short position from current levels given that risk points would make this a 1:1 profit/loss ratio at best. I’m feeling a little shut-out of the currencies so far, but without a clear direction or trend it’s not prudent to make recommendations.
Australian Dollar
Normally we see a reasonable correlation between the Canada dollar and Australian dollaron the charts, but for the past few weeks there’s been some separation. The net effect is that the spread between the two has narrowed by roughly two cents, and if the charts are to be believed, this may continue for another three or four cents. The RSI on the daily Aussie futures chart is 57. MACD is rising and the moving averages have crossed to the upside, although they’re still shy of a confirmed trend. Trading action has broken above trendline resistance and has been above both moving averages for almost two weeks. Traders may still be holding long positions from 0.8400, and if you are one of them, I don’t see any reason to bail out. Stops should have been raised to 0.8600 and stay there for now. Traders can consider buying at current levels (0.8700) with the same stop-loss.
Japanese Yen
The yen has been uncharacteristically cooperative with its charts. Traders should have re-entered long positions at 1.1250 and stop-loss orders initially placed at 1.1100 can now be raised to 1.1350, locking in 100 points. The RSI is getting a little high at 72 and the previous contract high of roughly 1.1600 may loom as resistance, but all trend factors are firmly bullish. Stay long.
British Pound
The British pound did in fact rise to my prior target of 1.5400. I have to admit the trend continues to look well established. The market is moving into resistance and the current level of the pound is a little too far above the moving averages for a buy right now, but traders can consider buy limit orders at 1.5200 with a 1.5000 stop-loss.
Feel free to contact me with any questions you might have about these markets or others, and to develop an appropriate trading strategy given your unique situation.
Gord Weisemann is a Senior Market Strategist based in Toronto, and is accepting Canadian clients. He can be reached locally in Canada at 416-369-7909 or via email at gwiesemann@lind-waldock.com. This article is based on an excerpt from his weekly “Weisemann Report,” which covers not only currencies but a variety of global commodity and financial futures markets.
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