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Monday December 7, 2009 - 12:53:42 GMT
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Stronger Dollar Continues to Wreck Gold

Liquidation in the gold market is continuing overnight triggered by a firmer Dollar. This move is a continuation of last Friday’s sell-off which was fueled by a surprise reduction in the U.S. unemployment rate. The change to the better from 10.2% to 10.0% helps strengthen the Dollar because of the possibility the Fed will begin hiking interest rates sooner than expected.

 

Last week, February Gold formed a weekly closing price reversal top.  This formation often leads to a 2 to 3 week break.  The current chart pattern suggests a minimum break to $1107.40 to $1079.00 is likely over the short-run.

 

Equity futures are trading weaker overnight.  The stronger Dollar is causing traders to rethink the carry-trade.  This should trigger weakness in the stock market as investors will be forced to sell stocks to pay-off Dollar based loans. 

 

The daily December E-mini S&P 500 chart suggests at break to 1098.50 to 1093.50 is likely.  A failure to hold this level should lead to an acceleration to the downside with 1077.50 the next likely target.  A trade through this price will turn the main trend down.

 

Weakness in the December E-mini NASDAQ could trigger further selling pressure to 1779.00 to 1770.25.  A trade through this zone could trigger an acceleration to the downside with 1741.75 the next likely target.  A trade through this price will turn the main trend down.

 

A sell-off today could send the December E-mini Dow down to a retracement zone at 10357 to 10321.  The main trend turns down on a trade through 10205.

 

Yields rose last week in the Treasury cash markets sending March Treasury Bonds and March Treasury Notes sharply lower following the better than expected U.S. Unemployment Report.  Investors adjusted their positions to accommodate the possibility that the Fed would begin aggressively phasing out stimulus and raising interest rates sooner than previously expected.  Although T-Bonds and T-Notes are trading higher overnight, selling pressure could surface if investors begin to factor in this week’s $74 billion auction.  There is no doubt that investors will be asking for higher yields for this new debt.

 

Technically oversold conditions are helping the December Japanese Yen regain some of last week’s losses.  The Dollar rallied sharply higher against the Yen after better than expected U.S. jobs data pointed toward the possibility of the Fed raising rates sooner than expected.

 

The reversal of carry trade positions also helped send the Japanese Yen to levels not seen since early November.  The friendly employment numbers forced traders to buy U.S. Dollars to pay back borrowed funds and short borrowed Japanese Yen.  Last week, the Bank of Japan helped put in the top in the Japanese Yen when it announced another stimulus package.  The BoJ seems to be leaning toward a less expansionary policy while the Fed readies to tighten.  This should help the Dollar gain ground on the Yen over the intermediate term.

 

Technically, the Yen is trading inside of a 1.0834 to 1.1790 range.  Last Friday’s break exceeded the retracement zone of this range at 1.1307 to 1.1195 before finding support.1.  The overnight action suggests that a pullback to 1.1401 - 1.1492 is possible.

 

Last week, the U.S. Dollar posted a huge gain versus a basket of major currencies.  The strong up move was triggered by a better than expected Non-Farm Payrolls Report which showed a decrease in the unemployment rate from 10.2% to 10%.  The pace of job losses also declined and there was a revision to the better in October.

 

Traders bought the Dollar on the thought the Fed would begin accelerating its process of reducing stimulus measures while gearing up to raise interest rates sooner than previously expected.

 

Technically, the move in the Dollar appears as a spike on the charts, but it did lay the foundation for a further rally this week by taking out the previous week’s high at 75.66.  The weekly chart is the one to watch for the best change in trend indicator.  At this time the main trend will turn up when this index crosses the November top at 77.50.

 

The short-term range is 77.50 to 74.27.  The retracement zone of this range at 75.89 to 76.27 is near-term resistance.  We’ve seen this move before three times before over the past 6 months.  In June the index rallied from 79.12 to 82.34 or 3.22 points.  In August the index rallied 77.83 to 79.92 or 2.09.  Finally, in October, the index surged from 75.08 to 77.50 or 2.42. This means that the current rally has to exceed 76.36, 76.69 and 77.49 in order to overbalance the previous rallies. Basically, the shorts have to sweat until 77.50 is taken out.

 

Last week, the December Euro finished lower.  Overnight, the main trend turned down on the daily chart on the break under 1.4801.  The break under a retracement zone at 1.4884 to 1.4823 also indicates weakness.  The possibility of the Fed raising rates before the European Central Bank is triggering the selling pressure in the Euro.  Last week, the ECB voted to leave interest rates unchanged.  It also initiated a hawkish stance when it announced it would begin phasing out its stimulus programs. Additional selling pressure hit this market when ECB President Trichet said he wanted to see a stronger Dollar.

 

The December British Pound is under pressure overnight after closing lower last week. While the Fed. and the ECB are gearing up to begin phasing out stimulus and raising interest rates, the U.K. is still struggling to exit from its recession.

 

The current daily chart pattern is bearish now that a lower top has been formed at 1.6720.  The main range is 1.5702 to 1.6876 with a retracement zone at 1.6287 to 1.6148.  This zone is the next likely downside target.  Additional support comes in at two main bottoms at 1.6258 and 1.6245. On December 10th, the Bank of England meets to discuss monetary policy.  Look for interest rates to remain unchanged while the BoE leaves its asset buyback program intact.

 

The December Swiss Franc is trading lower overnight. The breakdown under the last swing bottom at .9782 turned the main trend down. The sharp break in gold is helping to fuel the break. While the Fed is thinking about raising rates to stem inflation, the Swiss National Bank is still worried about deflation.  This means that an intervention by the SNB is not out of the question.  The situation will be clarified when the central bank meets on December 10th.

 

The Bank of Canada meets this week on the 8th.  Look for it to keep interest rates unchanged at 0.25%.  It may address last week’s surprise hike in the number of jobs added.  This may trigger a short-term rally, but gains are likely to be limited if the BoC expresses concerns about the impact of a higher currency on exports. 

 

Technically, this market is still trading inside of two ranges.  The main range is .9094 to .9798.  This creates a retracement zone at .9505 to .9574.  The shorter-term range is .9212 to .9609 with a retracement zone at .9410 to .9364.

 

March Crude Oil finished last week lower but inside of last week’s range.  This pattern suggests heavy volatility this week.  Falling equity prices, a stronger Dollar and bearish supply/demand fundamentals could put huge downside pressure on this market with a minimum downside target of 75.53 to 73.63.

 

 

 

 

 

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