Monday, November 16, 2009

Currency Corner

I wanted to take a big macro look at the longer term weekly currency charts as I was starting to become a bit nervous of a dollar bounce since everyone is so certain the dollar is going lower and also we have Obama in Asia the last few days and why in the world would the govt want the dollar to be making fresh lows just as the President meets with the largest holders of our debt? Also, Bernanke is speaking on Monday morning so the slightest slip of words could be a catalyst to see action in the dollar. Of course Bernanke knows this and will be safe with his words since he has learned the effects of his speech intraday.

I have started to see some weakness in the oil sector and crude itself. I think oil should have rallied last week after testing the previous 77-78 breakout area. It did not end the week too bullishly and alot of the oil service names that we were very bullish on into the end of year ( ie. OIH, COP, RIG) maybe showing us some sloppy head and shoulders patterns. Now this could just be consolidation but if crude fails to breakout above 80 in the next week or so I think it has a good shot of actually correcting back to 65, which is basically where it should be (or even 50) if you do not factor in the dollar weakness since March. Supply is mounting and demand really isn't coming back full force into the holiday travel season. I think there is a good 15-20 bucks of premium in oil based solely on the weak dollar effect. Nevertheless, I think it will be important to watch crude coupled with the dollar into the next month to see the next directional move. IF THE DOLLAR BOUNCES then oil will probably tumble fastest.

As for the currency pairs, out of the following I think the British Pound (gpb/usd) is the most interesting. It has been stuck in a tight range on the weekly chart for several months and is poised to make a move once it breaks the range. It looks like momentum is to the upside right now so assuming the Pound can breakout above 1.68-1.69 on a weekly basis it could lead the Euro and other similar currencies higher, which of course means the dollar index will go lower.

The EUR/USD is for sure at interesting levels going back to 07 but for it go challenge higher areas I think we would all agree we need a weekly close above that 1.505 mark.

AUD/USD is not far off its 08 high of roughly 0.98 and that sets up a potential retest double top area since the current rate is not far off at 0.9338. The Aussie is of course a commodity currency like USD/CAD and even NZD/USD.

These currencies all look similar since the commodity rally has powered them higher.

The USD/CAD is at important support levels near 1.03. Even though support is here near parity if the commodity trade keeps up this CAD can continue to strengthen against the USD and go right thru parity. But I would expect some kind of consolidation here at least in the short term for USD/CAD.

USD/JPY is also near support between 87.5-89 and could at least get a bounce going into the last few months of the year back into the massive descending triangle that has formed during the last two years.

EUR/JPY is also very interesting to me here as it has formed a nice tight range over the last 6 months or so. This cross rate was an excellent measure of risk appetite back in 08 but has decoupled a bit imo. Even so, it has formed a big ascending triangle pennant with resistance up at 138-139. Currently at 134 this could blast off to 153 into early 2010 if it wants to breakout. Even though the risk measure isn't as tight as it used to be; we can still use this to see how likely the stock market is to rally.

And just for fun the last one is the USD/INR which is the Indian Rupee. If emerging markets are strong then this chart should be going lower (or the Rupee appreciates against the USD). And it looks like it has formed a big nasty head and shoulders on the weekly with a breakdown in the cards. This should mean that the BRIC nations will be strong into 2010.

Overall, looking at all these weekly's and your USD thoughts I think it is prudent to be expecting some kind of dollar bounce in the coming weeks especially since the sentiment is so extended to one side, however I think we are still early to predict a intermediate or major USD bottom followed by a rally.


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