by Gord Weisemann

Last week I said that volatility and risk aversion were the primary themes, and this week we’ve seen round two. Both the S&P 500 and Dow Jones Industrial Average as well as several currencies moved beyond their “black swan” extremes. All things considered, I think most major markets are moving closer to fundamentally warranted levels.

Far be it for me to say what any given commodity or index is supposed to be worth but like I said last week, when base commodities keep running higher ahead of demand, the market is going to trip. Investor confidence is still rattled and rightly so. And I think the optimism over a rapid global economic recovery has been recast into a more realistic, gradual light. I’m going to take my own advice though and not get ahead of myself. I don’t think market lows are too far away–but we’re not there yet. Patience will bring the value buys we’re all looking for. Let’s take a look at the picture for currencies.

U.S. Dollar
I can’t say the U.S. dollar is in anything but an uptrend, but there are some curious technical anomalies on the daily chart of the June dollar index futures. First and foremost, open interest is declining fairly rapidly. Admittedly, we’re approaching the rollover period for June/September switches. However, in looking at the activity in the deferred contract, there’s just not enough participation out there to account for the exit in June.

Aside from that, the Relative Strength Index (RSI) climbed to 81, coincidental with the contract high to-date. Daily volume levels are strong but sporadic. All this paints a picture of short-term trading rather than position-trading. Even though the U.S. has received safe-haven bids, it appears that traders are still very reluctant to commit to a currency for any length of time in this environment.

Support for the June dollar index contract is found at 84.00. My preliminary weekly target of 87.00 has already been reached. Following a consolidation period, the next overhead objective should be 90.00. Consequently, I would remain a buyer of U.S. dollars until trends prove otherwise.

Euro
I had anticipated a move to 1.2300 at a time when many others already thought the selling was getting overdone. June euro futures have declined to just a little below 1.2200 and have bounced. A pivot-point sits at 1.2825 basis June. Volatility may mean a breach of this level, but is not a conclusive and definitive change in direction. I suggest traders consider selling euro futures at 1.2790, but be prepared to risk to 1.3100. Given the technical balance on the weekly chart, I’m still comfortable with a longer-term target of 1.1700.

Canada Dollar
The Canadian dollar has had some somewhat surprising downside. A revisit of the “black swan” low is not something I was expecting so quickly, if at all. That said, I did argue for selling the CAD with a 0.9900 risk, and so far, that’s been a lucrative position.

All technical factors are bearish, as are risk considerations and ancillary markets. The moving averages are well overhead and the 0.9300 low is coincidental with significant support. I suggest traders consider selling at 0.9575 and risk two cents. Any short positions currently open should be protected with a profitable stop-loss or outright liquidated for profit. While traders could look to buy on a short-covering basis I couldn’t recommend holding long positions given the abject bearishness of the chart.

Australian Dollar
The Aussie dollar has been stunningly battered. While I again expected downside, I did not anticipate the magnitude of the sell-off. The RSI has now reached oversold levels. The 10-day moving average is four cents overhead, which is historically unprecedented, according to my analysis. Traders looking for short-term opportunities can consider buying at current levels (0.8230) and risk the Friday low of 0.8065. This is counter-trend in every respect, but I can’t see a decent risk/reward ratio on the short side right now. Ultimately, I suggest traders look to sell June Aussie futures at 0.8500, risking a move to 0.8700.

British Pound
Some traders might have booked profits in British pound futures at the target level of 1.4250. There are some subtle bottoming signs on the daily chart, so while the general trend remains weak, I’m comfortable recommending that traders stand aside with profits in hand this week. A rally to 1.4800 might be attractive enough to consider moving off the sidelines and getting into shorts.

Japanese Yen
The technical picture for the Japanese yen was somewhat ambivalent last week, but leaned to the buy side. The last five sessions have made the long side the clear choice. Traders may have long positions on board from around 1.800 and if so, these longs should be protected with stop-loss orders at 1.0995. Looking ahead, traders might look to set buy limit orders at 1.0900 with a risk to 1.0775 if done.
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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