The U.S. July employment report was disappointing to say the least, and also included a negative revision to the previous month’s numbers. The second week of August brings us an FOMC meeting, where there is a growing feeling that Bernanke may have to add more stimulus to the system in order to get private sector job growth moving to numbers that would bring the overall unemployment rate down.
Canada’s employment numbers saw a massive loss of full-time jobs into part time. Although this is so far a one-off development it should create a high level of concern for economists. Personally, I think a double-dip recession in the U.S. is almost inevitable despite the White House’s affirmation that they see it as unlikely. I seem to remember something about Nero fiddling. Let’s take a look at trends and trade strategies for currencies this coming week.
U.S. Dollar
The U.S. dollar index futures contract has been building support in the vicinity of 80.60, which comes coincidental with oversold or near to oversold Relative Strength Index (RSI) readings. Fundamentally though, we’ll have to see if the disappointing July U.S. jobs report will undermine the charts. Although the daily lows since August 3 look supportive, the daily highs do not offer any progress so far.
The Moving Average Convergence/Divergence (MACD) is also showing a reluctance to turn, and from the perspective of longer-term support, I’d have to say 80 would be more significant. From a risk/reward standpoint there’s no question the dollar index is an attractive buy at current levels (80.75), even with a stop-loss below 80, but it is counter-trend and the past few weeks have generally not been kind to counter-trend trades. If it weren’t for the poor employment report, I think I’d recommend buying at current levels, but under the circumstances, I have to place greater emphasis on the existing trend and anticipate a decline to trendline support at 79.70.
Euro Currency
Meanwhile, the euro is stretching to new highs which, needless to say, corresponds well with U.S. dollar index lows. There are still some non-confirmation issues between RSI and trading levels but they’re still relatively minor at this stage. That said, RSI is at 72 and MACD is rising with a flat to declining histogram, so I feel as though the euro is nearing a high. I’m continually emphasizing the importance of trading with the trend, but as an exercise I’m anticipating the euro will run out of upward momentum at 1.3300.
Canadian Dollar
The Canadian dollar did finally gain some traction over the past week, and pushed to its highest level since early May. But behind the rally, technical indicators have remained weaker than I would expect under the circumstances. RSI peaked at 65 and has since turned down. MACD only turned nominally positive and daily trading volumes suggest that there wasn’t any substantial participation in the rally on the part of big traders.
I suggest that any traders still long September futures from 0.9700 raise any remaining stops to at least 0.9750, but in all reality traders should be flat at this time. For the first time in a very long time, Canadian jobs data failed to exceed market analyst expectations in July. The loss of 139,000 full-time jobs is to me an extremely significant issue that’s hidden behind an otherwise relatively benign headline net loss of 9,300 jobs. That’s not the sort of detail that will push the CAD to parity and beyond.
Australian Dollar
The Australian dollar has struggled to add a little more than another cent to its rally since last week, and the bull is looking progressively more tired and old. RSI continues to flat-line and MACD looks decidedly unconvincing as well. The moving averages are still trending well but they’re on their own in this one.
Trading volumes are of particular interest as they remain remarkably light. I may kick myself, for this but I absolutely have to defy the trend here and recommend a sell at current levels (0.9135). Traders should be prepared to risk to a new high and set stop-loss orders at 0.9260.
Japanese Yen
But for a minor breach of a stop level, some traders may have been left behind on this latest yen run. Stops set at 1.1540 would have been hit on August 2. Beyond that, the action in the yen has been remarkably predictable. Moving averages, RSI and MACD all support the run to new highs. That said, trading volumes are light and the indicators are supportive, not strong. Any trader who had not yet raised stops would be advised to do so now and set it at 1.1680. The weekly and monthly charts offer resistance just above our current peak.
British Pound
The pound continues in one of the smoothest trends in the commodity markets and therefore continues to be remarkably good to traders on the long side. Retracements have been minimal, which has afforded an opportunity to gradually raise stops without being caught in momentary declines (as with the yen).
This week, I suggest traders raise stops to 1.5700 from 1.5450 in the September futures, thereby protecting a full 500 points. We’re seeing resistance now just below 1.6000, so I don’t necessarily believe this latest stop-loss move will remain without a fill; however, I’m still quite content to let the market make the exit decision. RSI, MACD and the moving averages are climbing well, so I have to leave my faith in the trend for now.
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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