The end of the week brought us the surprising news that the SEC is bringing civil charges against Goldman Sachs in regard to disclosures for some of their mortgage products. This rocked investor confidence in virtually every product, but my initial guess is this reaction will be temporary. A significant number of commodity markets had been rallying on much lighter-than-normal trading volume. This took them in some cases to levels that weren’t warranted by fundamentals and Friday’s selloff puts some balance back into markets.

As always, trade with the underlying trend, but the coming week may bring about some decent opportunities. While the price swings are extreme, I don’t see the SEC’s actions as having broader implications for investors. Let’s take a look at the technical picture for currencies.

U.S. Dollar

For the first time since December last year, the U.S. dollar index has lost hold of its technical uptrend. Current indicators show the index in neutral as far as trends are concerned, so this necessitates a closer look at the details to try and figure out where the dollar is headed. The 10-day moving average for the June contract has broken below the 20-day, and trading levels have been below those averages for the past five sessions.

The Relative Strength Index (RSI) has dipped to 47 without any divergence issues, but it’s not trending down. We also have a basic top formation on the daily chart, but there has been little to no follow-through since the downward break. Stepping back a bit, the dollar index has been more sideways than anything else since early February.

There’s no question we have a downward bias to the daily chart right now, but I’ll need a confirmation of a trend as well as momentum before I’d recommend establishing short positions. In that respect, I have to recommend sell-stop-entry orders at 79.70 with an initial risk to 81.00 if done. Upward momentum in the meantime resumes with a close above 81.75.

Euro

As has been the case for the past couple months, the euro currency is still essentially a mirror image to the dollar. Trend conditions have improved to neutral. The 10-day moving average is slightly above the 20-day, and we have a weak bottom formation on the daily chart. In contrast to the dollar index, the RSI for the June euro futures contract briefly rose above 50, but currently sits in the upper 40’s, still a negative condition. While trading has been above the moving averages for the past five sessions, daily closes have become progressively lower. I have to recommend traders stay on the sidelines for now. My opinion, however, is that the recent bought of strength looks unconvincing for the longer term.

Canadian Dollar

In the Canadian dollar, I’m still identifying some RSI divergence issues that as the week ends, seem to be exerting some selling influence. Although the June futures contract did manage a new high mid-week, it was done with comparatively low trading volume. This low trading volume has in fact been a feature of conditions in the CAD since before the Easter weekend.

Overall technical indications still have the Canadian dollar in a well-established uptrend, but there are vague signs of at least a moderate correction coming. Divergence factors argue a short-term target of 0.9930. Below that the market should encounter good  support at 0.9890.

Australian Dollar

The Aussie dollar is still looking solid from a trend standpoint, but it suffers from the same low trading volume environment as the CAD. That leaves me somewhat concerned about short-term momentum. All things considered, I still have a preference for long Aussie instead of CAD. The moving averages are trending well, and support has been found at the 10-day moving average. While there are some nominal divergence issues, they are not as prominent as for the CAD. The 20-day moving average currently lines up with trendline support, so I can maintain a bullish outlook unless we see a break below 0.9150.

British Pound

By my measures, the British pound has now managed to establish an uptrend, but it might be a good idea to wait for a retracement before buying into it. Support is found at 1.5350 and again at 1.5200. From a risk/reward standpoint, I would recommend bulls buy on a limit at 1.5300, with a stop-loss at 1.5100.

Japanese Yen

Trading in the Japanese yen is unsurprisingly choppy. Technical indicators, while still on the bear side, are curling upward at a pretty fast clip. Short positions should be stopped-out profitably. Given that the lingering bias on the daily chart is still down and the weekly chart is shaping up negatively as well, I would recommend traders look for sell entry points with a risk to 1.0940. This is a cross-point on weekly moving averages. If there is genuine downward momentum, then we should not rise above that level.

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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