by Gord Weisemann

Is everyone getting used to the new paradigm? You know the one; less bad is the new good? The September 3 U.S. employment data was exactly that. The market had set itself up to expect a loss of 110,000 jobs and instead lost roughly half that at 54,000. And the July numbers were revised in a similar fashion. So the U.S. is still shedding jobs every month, and the officially declared unemployment rate remains at 9.6 percent–but all in all it’s less bad. So it’s good!

It’s been risk-on, risk-off back and forth for the past couple weeks. Economic developments have been anything but rosy, although in some instances they come in better-than-expected, which like I said before counts as good news. And that Hindenburg Omen is still lurking out there in traders’ minds. Couple that with the historical underperformance of equities in September and October and all things considered, I can’t head into the next few weeks with an abundance of optimism for upward market action. But the passing of the Labour Day weekend marks the end of thin summer trading conditions, so with any luck we can at least count on a return to trending conditions which one way or another is what we’re really looking for.

Now that we have all that out of the way let’s look at the chart impacts in the currencies.

U.S. Dollar

The U.S. dollar index is finding itself at a first critical support level, with September futures so far holding 82.20. (This is the last week I’ll be charting the September contracts; traders should be looking at December for trading purposes but the chart details are still a little light at this time). Both the Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) have flattened out at neutral readings, and the moving averages are converging.

For the index to maintain any semblance of a bullish trend it must hold 82.00. Even now I find myself growing skeptical about the dollar being able to maintain an upward trajectory. I think risk/reward ratios favour a buy at current levels, but a stop-loss at 81.95 is paramount. In fact, this level would best be set as a stop-and-reverse as a breakdown at that level could mean significant declines back into the mid-70’s. It’s do-or-die time for the big dollar.

Euro Currency

Two weeks ago I was a confident bear in the euro, but in the intervening time it has managed a rally above trendline resistance. My critical stop-loss level for the September contract is still well overhead at 1.2965, but current conditions warrant a reevaluation of my commitment to the downside. The RSI is rising to 52 and the MACD is crossing up, although at this stage it’s too early to say there’s any conviction in the cross. The moving averages are still more negative than positive. I should be backing away from the short side out of an abundance of caution, but I’m still not convinced that Europe will be able to deliver a consistent string of positive economic releases. As a result I’ll maintain a bearish bias.

Canadian Dollar

For all its intermittent volatility, it would look as though the Canadian dollar has decided on a trading range of 0.9300 to 0.9900, more or less. To be precise,  0.9350 has set itself up as a critical support level. I see any close below that level as a major shift in long-term sentiment. Overhead resistance is found at 0.9520.

The RSI and MACD are beginning to turn up, but I’m apprehensive about recommending buying at the current level (0.9580) given the speed of the rally and the fact that much of it comes hand-in-hand with an unwinding of the carry trade, which may not continue much beyond its current course over the short term. Selling strength remains my recommended strategy from a risk/reward basis, but the trend may be turning; therefore, stops should be kept within 40 points of any entry.

Australian Dollar

A lot has changed in the Australian dollar over the past two weeks. We had seen a close below 0.8892, but that also marked the bottom of the decline, which is definitely not what I would have expected from such a setup. In the meantime, the currency is retracing back to its previous high but I see little fundamental reason for a sustained move above that.

The majority of the recent rally has been on the back of fairly light volume. While previous short positions should have been exited for effectively small gains, I’m still inclined to recommend the sell-side as the preferred trade at this time.

Japanese Yen

The yen has sold off amid an unwinding of the carry trade, as risk appetite returned to the market after the September 3 U.S. employment report. That said, in my view, the yen remains in a more bullish than bearish technical environment. Friday’s low of 1.1733 finds support precisely at a trendline that has been supportive for the yen since May 5 of this year. The RSI still sits at a positive reading of 53 and the MACD, while flat, is also on the positive side. The Bank of Japan has hinted at intervention, but officials have said (off the record) that for the time being, the rally has been sufficiently orderly so as not to generate an abundance of concern.

British Pound
The pound continues in a slow moving downtrend, and traders may still be short the September contract from 1.5500. In this case, stops should come down to the entry level as momentum is waning somewhat and potential vulnerability in the dollar could lead to a bounce. The 1.5200 level looks to be a reasonable target in the short-term.
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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