WILL THE DOLLAR CONTINUE TO RISE?
On the last trading day before Christmas week, when everyone goes into holiday mode, the dollar held onto its recent gains against all of the major currencies except for the comm dollars (AUD, NZD and CAD). Although many of the major currency pairs ended the day virtually unchanged, on an intraday basis, there was quite a bit of volatility in both currencies and equities. Considering that today is Quadruple Witching, when stock index futures, stock index options, stock options and single stock futures all expire, the volatility is not particularly unusual. Instead, the lack of economic data in U.S. and the flat price action in the EUR/USD has many traders wondering how much further if the dollar will rise.
Will the Dollar Continue to Rise?
In the foreign exchange market, we have long learned that trends can be longer and deeper than most people would normally expect. The latest downtrend in the U.S. dollar for example lasted for more than 8 months. Since the turn in the U.S. dollar is supported by a turn in fundamentals, there is a good chance that it could continue. However dollar bulls may have to wait until the New Year for the dollar to resume its rise since next week’s economic reports may hurt more than help the U.S. dollar. The key U.S. economic releases on the calendar include the final release of third quarter GDP, durable goods, existing and new home sales. No major revisions are expected to Q3 GDP but given the drop in builder confidence and the previous jump in existing and new home sales, the housing market numbers may retreat. Also, the volatility in the week of Christmas tends to be less than two thirds that of the typical volatility that we see in the EUR/USD and USD/JPY throughout the year. If the dollar gains traction however, pushing the EUR/USD lower, the sell-off could stall at 1.4150 region, where we have the 200-day SMA and the 38.2 percent Fibonacci retracement of this year’s rally coming in as support.
Is the Dollar’s Downtrend Over?
Despite the obvious rebound in the U.S. dollar, many investors and economists have a hard time believing that the long term trend in the dollar has really changed. They point to the aggressive spending by the U.S. government and the growing budget deficit as the primary reasons why structural demand favors dollar weakness and not strength. They also indicate that even though the U.S. economy is improving, growth in the first half of 2010 will be modest at best and the fears of the blowup in Greece spilling over to the larger members of the Eurozone are exaggerated. Although we also believe that the spending by the U.S. government will only increase in the coming year, in the near term, foreign central banks still have to buy dollars. Trading is also an expectations game. The dollar could resume its decline which means the rebound that we are seeing now could be temporary, but until the market has a reason to change its bias, it won’t. The next test of the U.S. economy will come from the December non-farm payrolls report, which is not due for release until January 8th.
Forex Traders Increase Long Dollar Positions, Short Euro Positions
Meanwhile, foreign exchange traders in the futures market increased their short euro, long dollar positions. Last week’s CFTC Commitment of Traders report revealed that futures traders turned net short EUR/USDs for the first time since March. On Monday, we talked about how this shift in positioning tends to foreshadow a sharp decline in the currency pair. As of December 15th, before the break of 1.45 level, EUR/USD net short positions were at 16,448 contracts, up sharply from 511 contracts a week earlier. From a sentiment and positioning perspective, this suggests that the dollar has more room to rise even though it just recorded its biggest one week rally against the euro since October. Although future traders are net long dollars against the euro and Japanese Yen, they remain net short dollars against all of the other major currencies which implies that they are not as bearish about the Australian or Canadian economies as they are the Eurozone and U.K. economies.
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The combination of the negative news flow from the Eurozone and last weeks SNB announcement to halt its 9-month old policy of bond purchases has dealt a blow to the EURCHF pair, dragging it to a 9-month low of $1.49. The SNB had acted to stabilize the pair by selling CHF for euros at 1.50 and later at 1.51, where the pair held for 5 months. With SNB pres Roth leaving by year-end and SNB set to withdraw liquidity, we could see the previous floor of 1.5055-60 to serve as a new ceiling, which could further drain Swiss liquidity as markets anticipate policy normalization. German IFO better than exo, helping EURCHF to 1.4980s, but resistance seen at 1.5030. UK Nov deficit & money supply data due at 9:30 GMT. New resistance stands at $1.6250.
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we are still trading within the inside bar on FTSE 100 from the 26th Nov
we are printing lower highs but no lower lows as of yet with 5200 being the support level in the interim, hence the reason why i am long from 5210, 5200 ..i will look to another long @ 5290= 5300 average entry .....and have stop stop loss 5170 !!
target 5280-5310
If we take the body of the candle sticks then we have a downward sloping wedge formation, in technical analysis there is a 80-90% probability of market breaking out to the upside as buyers are building a base....in this case its at 5200.
> 5200 we go to 5360 and above to 5500
< 5200 then we have a meltdown to 5000
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The U.S. dollar extended its gains against all of the major currencies but the price action in the forex market along with the equity and treasury markets suggest that traders may not be buying dollars only because U.S. fundamentals are improving. Theoretically, the Federal Reserve’s optimism should be positive for the dollar, mildly bullish for stocks and bearish for bonds. Although the greenback has strengthened quite dramatically particularly against the euro, stocks have fallen sharply and bond prices have risen. USD/JPY has also failed to extend its gains over the past 48 hours. This inconsistent price action implies that other factors may be at play.
Is There a Dark Cloud in the Dollar Rally?
If the market really interpreted the outcome of the Federal Reserve meeting to mean that the central bank is moving closer to tightening monetary policy, then bond prices should fall and yields should rise. However, the opposite is happening which suggests that risk aversion could actually be driving the dollar higher and stocks lower. In fact, the price action in all 3 asset classes along with USD/JPY are more aligned with a risk aversion move than renewed optimism towards the U.S. economy. This leads us to the question of what is making investors nervous. Things may be improving in the U.S. but fresh problems have surfaced in Europe. Greece’s fiscal situation is still causing a drag to risk appetite while the latest plans by Standard & Poor’s to review the ratings of covered bonds has many investors wondering whether Greece is only the tip of the iceberg. U.K. banks still have to decide whether they want to pass the 50 percent tax on bonuses to their shareholders or employees. Most likely, this will translate into weaker earnings for the financial sector. Since the beginning of the month, the U.S. dollar has also rallied close to 5 percent against the euro which will inevitably have consequences. Much of the improvement in the U.S. economy has been fueled by the weakness of the dollar and now that it is recovering, the pace of the U.S. recovery could suffer.
Concern about Job Losses
Based upon the latest jobless claims report, there is also a good chance that job losses are accelerating. The last 2 reports were survey weeks which mean that they will be used to extrapolate December non-farm payrolls. Weekly claims increased for the second time in a row from 473k to 480k while continuing claims rose from 5.181M to 5.186M. Part of the reason why investors turned bullish dollars after the non-farm payrolls report is because the degree of job losses last month put the economy within striking distance of positive job growth. If payrolls fail to deliver, we could see the dollar resume its rise as investors readjust expectations. However aside from jobless claims the other pieces of economic data released this morning reinforced the overall improvement in the U.S. economy. The stronger than expected manufacturing activity in the Philadelphia region offset the decline in manufacturing activity in the Empire State. The Philadelphia Fed survey rose to the highest level since Feb 2005, which suggests that the manufacturing sector is still chugging along. Leading indicators also rose by 0.9 percent thanks to an improvement in jobless claims, average workweek, building permits and consumer expectations. Finally, the Senate Banking Committee backed Fed Chairman Ben Bernanke for a second term. Despite the dissent within the Committee, the charade has ended and Bernanke can get back to his job of fixing the U.S. economy. There are no economic reports from the U.S. tomorrow which could lead to quiet trading.
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I am a technical trader. Therefore, I don't place trades based on news announcements. I have various beliefs that my experiences have taught me regarding these announcements that have generally taught me the same lesson: stay away. I am discussing only major news announcements; I don't really pay any attention to the smaller announcements because they usually don't move the market much. Below I will go through why I avoid trading during major news and various strategies for dealing with news announcements. Remember that I trade a very specific way and I am not saying these announcements are not interpreted and used differently by others. But the below theories have proven to be useful when trading with geometric pattern recognition.
First off, I believe that news announcements are almost totally unpredictable. As you may know, there is usually a "forecast" and a "previous" number listed before the news announcement is made. The market's reaction is generally based on whether the actual announcement is higher or lower than the forecast. The problem is that this assumes all traders (or even most traders) react the same way to the relation between the actual number, the forecast, and the previous number. Even if we could correctly interpret this information, it is difficult to enter trades during these times because execution suffers within a fast moving market.
In my opinion, these releases have very few long term implications and are unpredictable in the short term. Of course, there are traders that may use these numbers to some degree of success, but I have never seen any strong evidence that you can profit while trading those numbers over the long term. Anyway, the one constant around major news announcements (such as non-farm payroll) is that there are rapid moves with above average magnitude. These moves can be very erratic. Sometimes the move is in one direction. Sometimes the move looks like it will be in one direction, and then moves back to the starting point just as rapidly.
Furthermore, these moves can be very irrational. Not only do they often ignore the logic of the news announcement itself, but these moves often ignore the logic of the technical analysis we post. It would be much easier to trade these announcements if traders were rational, but they aren't. Therefore, to me the most useful aspect of these major announcements is the time they take place. I then use the timing of these announcements to avoid placing trades right before them.
If a pattern has almost completed, there is no advantage to placing a trade immediately before or after a news announcement. Let's say that this trade is a long opportunity. Let's also say that the pair is just above the entry. If this is the case and the news makes the pair shoot up, then we never entered and there would be no trade. If the news makes the pair shoot down, then we will likely be stopped out. Therefore, we never would take this trade. Here is an USD/JPY trade that was in this exact situation. Now, this trade had already been invalidated as we wrote here . Look at the USD/JPY analysis and you will see what happens in this situation.
If the pattern is farther from completing, we still wait to enter until after the price action due to the news announcement has calmed down. If we have already entered a trade, we may close it before the news announcement comes out. This varies on a ton of different situations, which would be too long to write about on this article. For now, I could come up with theories on your own about this problem. At some point, I will probably write an entire article exclusively about that situation.
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US dollar index surges to 77.50 (highest since Sep 8th) as EURUSD breaks below $1.44 for the first time in 3 months, further nearing our HotChart target of $1.4270. GBPUSD drops to $1.62, awaiting Nov retail sales (exp +0.5% from +0.4%), which could decide the fate of the currencys trajectory. Disappointing UK sales would risk retesting $1.6160, followed by $1.6130, while any rebound remains capped at $1.6370. USDCAD tests the 3-month trend line resistance from at 1.07, eyeing interim target at 1.0740.
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