by Gord Weisemann

Volatility and risk aversion are still the primary themes in the market. In many respects though, I don’t think the sell-offs we saw in the stock market and some commodities markets in early May is unwarranted or out of line with global fundamentals. Traders have been trampling over one another to get in ahead of “the recovery,” buying everything in anticipation of better times.

The problem with this approach is that it shoots the recovery in the foot. We need primary commodity prices to stay relatively low during the initial stages of the recovery. If speculative funds keep running them up in anticipation of demand that isn’t here yet, then the recovery will sputter and stall every time and only regain traction after prices decline again. Let’s take a look at the picture for currencies.

U.S. Dollar
The U.S. dollar remains in a strong uptrend. However, there are now a few issues on the daily chart of the dollar index futures contract that argues stop-loss orders should be tightened up as the market is getting closer to a correction phase. The most recent high on the index has not been confirmed by a new high in the Relative Strength Index (RSI). The RSI is still hanging out just below overbought levels. Daily trading volumes are also getting light.

The 10-day moving average at 84.46 is first-level support for June futures. The 20-day moving average at 83.10 coincides with trendline support, so this is a more significant line of defense. All things considered, I think the U.S. dollar remains in a bull market, with a buy-weakness strategy looking like the best course of action. The next overhead objective remains 87.00.

Euro
On Friday, May 14, the euro currency moved to a new low, and I don’t suspect we’re done with this sort development just yet. In the short-term, the market is approaching a preliminary level of support on the weekly chart. We’re also seeing characteristically inverse RSI and oversold levels relative to the U.S. dollar index. The euro may be able to press to 1.2300 over the next week, but I suspect it will get a technical reprieve from selling pressure around that level. We haven’t had any new Eurozone developments other than more rumor and conjecture, so I think traders will be looking for an excuse to book profits and re-enter shorts at preferred levels. Overhead resistance is found in the 1.2950 to 1.3000 area in June euro futures. I believe any rally back into that vicinity should be seen as an excellent selling opportunity. I maintain my longer-term 1.1700 target.

Canada Dollar
The Canadian dollar has presented a challenging technical trading environment with its massively overdone sell-off to 0.9300. I had been expecting a CAD correction to 0.9700 at a minimum a few weeks back, and we’re effectively in that zone now. Open interest and daily volume levels indicate that traders are still somewhat risk-averse at the moment, despite our potentially favorable interest rate environment and our oil and gold correlation. The moving averages and RSI still carry a sell bias.

I recommend traders might consider cautiously selling rallies with stop-loss orders set at 0.9900. The next downside level for CAD would be a revisit of 0.9600.

Australian Dollar
The Australian dollar doesn’t look significantly different than the Canadian dollar. Last week’s sell-off significantly overshot any reasonable shor- term target level, but the recovery since then shows hesitation and has also been
capped so far at the 10-day moving average.

Daily volume and open interest show risk aversion. I recommend traders look to sell rallies with stops at 0.9100. The downside might push as far as a revisit of 0.8700.

British Pound
The past week has been cooperative for traders in the British pound. I had suggested traders sell rallies to 1.5000 with a risk to 1.5200. Highs were capped at 1.5050, and we’ve since seen a renewed push to the prior low near 1.4500. The moving averages and RSI look better balanced in this currency than in some of the other majors, so looking ahead, I see no barrier between current levels and trendline support at 1.4250. I recommend traders stay short June British pound futures.

Japanese Yen
I believe the Japanese yen is still carrying a slight technical bias to the long side. The 10-day moving average is above the 20-day moving average, and diverging slightly. The RSI reads 51 and is also rising slightly. Trading has been on both sides of the moving averages, but has favoured the top-side. If traders need to take a side, I suggest they buy with a stop at 1.0650.
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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