The past week has brought on some choppy trading sessions. Equity markets have been held back from progress in either direction by futures and options expirations. I’m getting a little concerned that some price action in the markets is reminiscent of early 2008, when we were seeing speculative price rallies unsupported by legitimate demand. Granted, it’s not happening in the energy market (where such a development has far reaching implications), but there’s eerily similar rationales for rallies in grain and livestock prices as well as copper. The story always seems to be anticipated demand, anticipated crop failures. And yet behind the headlines, inventory levels are far from emergency points.
Ramping up prices too soon can’t end well for the broader economy, and the first few economic releases for the final quarter have already been far from robust and confidence-inspiring. I’m usually a little early in my macro analysis, but I still see selling on a much larger scale on the horizon. Let’s take a look at action in the currencies.
U.S. Dollar
Coincidental with a break below stop levels at 82.20, the U.S. dollar index futures fell into a bearish trend and remained so since. The Relative Strength Index (RSI) reads 37, the moving averages are trending down and the Moving Average Convergence Divergence (MACD) is beginning to set a downward trend as well. There is, however, a major support level between 80 and 81, so unfortunately the risk/reward ratio is poor as far as short positions are concerned. So, all I can do at this stage is warn against long positions but reluctantly remain on the sidelines as far as new trend-based positions go.
Euro
With the action in the dollar index being what it is, it’s little surprise that the euro currency has broken out higher and established an upward trend. All technical indicators are bullish. Major support is well established at 1.2600. Short term retracements are possible to 1.2900, and nearby trendline support is found at 1.2750. Ideally, I recommend traders look to buy pullbacks with stops below major support.
Canadian Dollar
The Canadian dollar trend continued to enfold bullishly in the past week, so looking back to my previous update, I’m disappointed in myself for having recommended a short attempt that didn’t work out. Admittedly, the dollar has now posted a double-top at 0.9768, so we’ve seen some late week profit-taking pressure, but this comes far too late to be of any help in having shorted against the trend a week ago. In fact, if I were to be trading against the trend, this week makes more sense.
The RSI is curling down and MACD is showing divergence. Trendline resistance is overhead at 0.9796, which hasn’t been tested but the double-top may halt the action nonetheless. The CAD in general has underperformed when compared to the other major currency pairs. All that said, I’m not prepared to move counter-trend two weeks in a row so with some conflicted chart indicators, I’ll move to the sidelines this week and wait for further clarification.
Australian Dollar
The Australian dollar has moved into its previous high range between 0.9330 and 0.9380. So far that has marked the top of the run, but in my opinion, the technical picture is still pretty bullish. There are some divergence issues in MACD and RSI is only running at 67, which, when put in contrast with a new contract high, is definitely unimpressive. As I’ve already said with other currency pairs, I can’t recommend trading against the trend again, but I feel we must be near to a top and therefore the Aussie dollar looks like a selling opportunity. I’ll be watching this currency closely over the week.
Japanese Yen
The Bank of Japan finally stepped in to curb the yen’s rise. What the BOJ intervention did to the chart is so far minimal, but it’s hard not to pay attention to a 400-point range day. The moving averages have turned down but have yet to cross. RSI slipped to 44 and MACD has abruptly moved to negative; but with all of this the result of a single trading day, it’s difficult to say that the four-month old bull trend is necessarily over.
The BOJ typically intervenes in two legs (if past action is to be taken as a guideline) so I’m reluctant to recommend moving back to the long side until the other shoe drops. I’ll step out to the sidelines here too.
British Pound
In the past week, the moving averages have crossed up, RSI has risen to 57 and the MACD crossed as well. It’s a little early by my methodologies to declare an uptrend, but I’ll be watching for a buy signal to develop as the week rolls on.
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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