To me the most significant market developments over the past couple weeks have been the continued rise of the bond market combined with a U.S. dollar rally and a crude oil selloff. Even excluding the action in the carry trade (YEN/AUD/CAD), this is a fairly loud and clear sign that investors do not see the U.S. economy in an optimistic light.

And while we’re here, the carry trade does still show signs of risk aversion but it’s going to be a little tougher to interpret moving forward because of the yen’s extreme cross level against the U.S. dollar. If the carry trade has run its sphere of influence in the short-term, then we may see an even more aggressive U.S. dollar rally as the yen and the euro are the two heavyweight components of the dollar index.

All things considered, the equity markets look ugly and although I tend to stay away from rampant prognostication, I can only see the S&P on target for new lows. I suspect the proverbial nail in the coffin could be hammered in on August 27, with the second quarter U.S. GDP numbers. As I’ve watched the numbers unfold, I can only see the preliminary 2.4 percent figure headed for a revision to below 2 percent. Bear in mind that in the U.S., real unemployment is masked by calculation methods. There’s absolutely nothing in the details that suggests upward revision or even steady numbers would be remotely possible. Let’s take at look at action in the currency markets.

U.S. Dollar
The momentum low that had been developing in the U.S. dollar index futures looks to have turned into an actual low. The Relative Strength Index (RSI) and Moving Average Convergence/Divergence (MACD) readings have turned bullish, and this has occurred coincidental with the market reaching a level of support that held for two and a half months back between February and March of this year. Open interest has also built significantly with this bounce, so the inference here is that this is once again building into a significant support level.

The moving averages have not yet turned, but I see every indication they will in the near term. Given the 275-point rally from the absolute low trade in four sessions, I have to expect there will be some degree of cooling to the move. However, I recommend buying the index on any retracement with a 79.90 stop-loss. A 50 percent retracement of the down move will roughly coincide with a retest of a previously supportive trendline at 85.00 in the September futures contract, so for now that would be the upside objective.

Euro Currency
The September euro futures ran out of momentum at 1.3300. Since then all indictors have turned negative. Open interest levels paint an interesting and telling story. Total open interest declined significantly the day before the 1.3300 top and began building significantly again on August 11, the same day the euro dropped 319 points. This suggests traders have done an about-face from long to short in fairly large numbers. Two days after August 11, the market has topped-out at what had been the last resistance line of the old Fibonacci fan I had been following since May 3. This technical pattern may be back in play, in which case traders might consider selling the euro futures at current levels (1.2825) with a stop-loss set at 1.2965 and an initial target of 1.2495.

Canadian Dollar
I was skeptical of the power of the Canadian dollar’s rally-- and apparently rightly so. There never did look to be heavy participation in the run-up to almost 0.9900 in the futures, and ultimately I think the weak employment number put the nail in the coffin of that rally.

What it did do, however, is establish a high more or less exactly in line with three previous highs at 0.9890. If nothing else, this has now been set as a significant level of overhead resistance. Otherwise, RSI and MACD are negative but now showing some apprehension to move much more. The low on August 12 held at trendline support.

Although I have a mild inclination to recommend buying here and risk that recent low, it’s a counter-trend idea and combined with the strong looking dollar index chart, I think it would be smart to stay on the sidelines this week.

Australian Dollar
The Australian dollar was good to traders as a counter-trend opportunity last week. Failing RSI, weak MACD and negligible daily trading volumes all occurring simultaneous with a test of a three-month high meant downside was imminent.

That said, one week does not make a trend, and what I have to watch closely is the support at 0.8900 on the weekly chart. So far that level has held. Combine that with the fact that RSI, while declining, still reads a +52. A close below 0.8858 will convince me of continued downward momentum, in which case I’d leave the door open to a decline to 0.8500. Behind everything, the spread between the CAD and the AUD is a little on the tight side which may put some near term pressure on the Aussie.

Japanese Yen
The yen looks to have reached a momentum peak for the moment. Neither RSI nor MACD have turned lower, but they have flat-lined. There is also price/RSI divergence that argues for a correction back to trendline support just above 1.1500.

British Pound
All good things must come to an end, including the British pound trend. While it might actually be a little early to declare the trend emphatically over, it’s come to a halt not only at chart resistance but also psychological resistance at 1.6000 in the September futures. RSI is still clinging to a positive reading at 52, but only barley. MACD has made a good turn for the downside and trading levels have breached the 20-day moving average. There’s still a little lingering momentum on the chart, so I’m not prepared to turn around and recommend the short side so quickly. However, I keep reflecting on the dollar index chart so I have to believe the short side is where traders will find the next good opportunity.
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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