The past week has been a risk-on, risk-off, back-and-forth environment. Technically the pro-risk side traders are gaining a little of the upper hand as equity markets have pressed above some trendline resistance. As I write this, the European bank stress test results are being released and the initial outcome looks as though seven of the 91 banks would fail. The transparency of the test should allay some investor concerns, but where I see some doubts remaining is in the area of sovereign default. The tests asked banks to assume losses only on the government bonds they hold on their trading sheets, not those they hold to maturity as collateral. This implies a foundation for the test where it’s assumed no member of the EU could or would default.
I for one don’t share the same level of faith in the EU that the test creators must possess. That said, the markets should take some relief in getting this event behind them and hand-wringing aside, we should see a little relief rally over the next few days.
U.S. Dollar
The U.S. dollar continues to decline, and with the recent mid-week rally we’ve actually seen a slight easing in both the Relative Strength Index (RSI) and the Moving Average Convergence/Divergence (MACD) for the September Dollar Index futures contract, which could open the door to new lows in the short term. Although the index has found some marginal support in the 82.25 to 82.40 area, I don’t see any reason to have faith in this as any sort of bottom for now. In fact, I don’t think trendline support will emerge until almost 81.00, which coincides with a long-term consolidation range from February through April of this year.
Euro Currency
The euro has been held back at the 63 percent retracement level of a Fibonacci fan that I’ve been watching since the first trading day in May. Behind that however, all trending indicators remain bullish. There’s a psychological barrier at 1.3000, and a large physical cash barrier that more or less coincides with this Fibonacci line. There may yet be a bit of a struggle, but the RSI is not overbought and the MACD is not overextended, so I have to remind myself that the more significant chart condition here is the strong uptrend. Although this is a somewhat uncomfortable recommendation for me, particularly since as I write this the results of the European bank stress tests have yet to be released, I have to recommend being a buyer of the euro futures at current levels (1.2889) with a risk to 1.2680.
Canadian Dollar
The Canadian dollar is trading in an ever-tightening wedge. The top end originates with the April 21 high, and the bottom begins with the low on May 25. Though there are some intra-day aberrations, it is fairly well-defined. There’s still a risk that the dollar will remain rangebound in a broader channel, but with both the RSI and MACD neutral, I think trading a breakout is the right approach. As such, I suggest traders buy September Canadian dollar futures on a 0.9700 stop-entry, or sell the dollar on a 0.9425 stop-entry with the unfilled side initially to be used as the stop-loss order. The entry orders will tighten daily, so traders interested in this approach should be prepared to check with me each morning to re-set.
Australian Dollar
A brief stab lower on July 19 took the Australian dollar below 0.8600. The move stopped out short positions, which is unfortunate since the market continued higher. Unlike its Canadian counterpart, the Aussie has been riding a fairly well defined uptrend for the past several weeks. The spread between the two currencies has narrowed by roughly 90 points since last Friday which is something I had expected. Looking ahead, there is trendline resistance at approximately 0.8960. Neither the RSI or MACD suggest that the Aussie dollar is getting tired, but this trendline level will coincide with previous highs in that area, so I suspect at the least, we’ll see the currency take a break at that point.
Japanese Yen
The yen tested its contract high of 1.1600 and has since consolidated. This in itself is a little unusual and traders should take note. Typically the yen posts spike-highs and lows, so a move to a contract high double-top followed by less than a 200-point correction is a departure from the norm. Traders should still be long from 1.1250, and stops should be raised again to 1.1400 from 1.1350. If stopped-out, I would recommend buying back in at 1.1325, with no more than a 100-point risk. This unusual pause near highs suggests to me that traders are still wary and sit poised to further push the carry-trade away from risk.
British Pound
The trend on the daily chart of the British pound still looks well established, but both the RSI and MACD are looking flat. Coupled with the fact that the pound has again reached but paused at my 1.5400 target level, I suggest traders with positions established near 1.5200 be defensive and raise stops from 1.5000 to 1.5300.
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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