The EUR USD confirmed Wednesdayâ€™s closing price reversal
bottom and surged to the upside on Thursday. Based on the chart pattern,
traders should look for this move to continue with 1.2742 to 1.2884 the next
upside target zone.
All day long the market was flooded with negative chatter
about the Euro which turned out to be the sign that too many people were short
the currency. Often times a market will go down until the weakest short puts on
a position and this may be the case with the Euro since the whole world has
known about the debt problems in the Euro Zone since January.
Traders are citing the cause for the reversal in the Euro as
two key events. The first was already mentioned, the huge amount of shorts in
the market. The second was a slightly positive reaction to moves by European
Union government officials. Although no solid â€śintelâ€ť has come out of the not
so secret meeting being held by the EU nations, traders reacted today as if â€śno
news is good newsâ€ť and covered their short positions.
Rumors circulated throughout the day about a secret meeting
of the European Central Bank. Since an aid package has already been proposed,
some traders are surmising that an interest rate cut to zero or an intervention
may be being considered. An intervention doesnâ€™t make sense because buying
oneâ€™s own currency is usually met with equal or greater selling pressure. An
interest rate cut to zero will help provide liquidity to the Euro Zone but at
the same time signal that the ECB believes there will be no growth in the
Whatever happens will definitely contribute to the
volatility in the Euro. This is because investors are screaming for clarity and
action. They are tired of getting half-heartened attempts to shore up the
economy along with virtually no decisive action. Although EU officials are
downplaying expectations of any effort to underpin the Euro, traders seem to be
taking no chances after the recent huge sell-off and are taking money off the
table to protect their profits.
In other action today, traders dumped higher risk assets,
driving commodity-linked Forex markets lower while pushing up demand for the
lower yielding Japanese Yen.
The lack of clarity regarding proposed regulatory
legislation and the surprise curbing of short sales by Germany made
investors nervous. Throughout the entire Greek debt crisis, investors have been
looking for clarity and conviction from the European Union. Each time the EU
has made a proposal, they have failed to explain to investors the logic behind
the move. This weekâ€™s move by Germany
to forbid the shorting of bank stocks is a good example of what is triggering
the fear in the market today.
Institutions are confused by the action in Germany because
the regulators have basically changed the rules of the game. Institutions are
worried that the proposed changes in U.S. regulations are going to make
it more difficult to protect risky positions in equity markets. What this means
is large investors are unsure how they are going to hedge their exposure in the
markets and instead have chosen to pare back positions to reduce the
possibility of large losses. Without knowing what the regulators are going to
allow them to do, it doesnâ€™t make sense to take on added risk so liquidation
seems to be the only viable option.
In addition to confusion over regulatory issues, investors
are blowing out of risky commodity-linked currencies because they feel the Euro
Zone debt problems are going to derail the global economic recovery. This means
the real possibility of a global double-dip recession.
Hedge funds and large investors continue to divest out of
the commodity-linked Australian and New Zealand Dollars. Traders feel that the
spread of Euro Zone debt woes will curtail the global recovery and lead to a drop
in demand for raw materials.
Technically, downside momentum in the Aussie Dollar could
trigger a sharp decline to 50% of the October 2008 bottom to the November 2009
top. This range is .6008 to .9405 with a minimum target price of .7706.
Based on the monthly main range in the New Zealand Dollar of
.4892 to .7635, traders should look for this currency to correct to .6263 if
downside momentum continues at its current pace.
Falling crude oil triggered a huge rally in the USD CAD. Thursday
morning surge put this market in a position to take out the recent top on the
daily chart at 1.0738. This is a minor point on the long-term chart. A drive
through the February 2010 top at 1.0780 is likely to trigger more
short-covering which will threaten the structure of the bull market in the
As investors dumped higher risk stocks and commodities, the
proceeds from the sales flowed back into the Japanese Yen, sending the USD JPY
sharply lower. U.S.
equity markets finished sharply lower amid concerns the Euro Zone debt crisis
would disrupt the global economic recovery and undermine demand for
Technically, the Dollar/Yen broke through an uptrending Gann
angle/50% retracement cluster overnight, sending this currency pair sharply
lower. Based on this monthâ€™s main range of 94.98 to 88.25, a pivot price was
created at 91.61. In addition, uptrending Gann angle support from the March
bottom at 88.14 came in at 91.58. The plunge through this cluster overnight
indicated that stops must have been under this setup. The current chart
formation indicates that 91.61 is the new resistance and 89.86 is the next
The GBP USD had very little follow-through to the upside
after Wednesdayâ€™s closing price reversal bottom. Although the reversal bottom
was negated by Thursdayâ€™s intraday sell-off, the lack of follow-through to the
downside and the strong comeback rally indicates that sellers are scarce and
shorts are still willing to cover at current levels.
Fundamentally, the British Pound is not only feeling the
pressure from the collapsing Euro, but traders are also beginning to factor in
the austerity measures the new government is going to propose. Some traders
feel that the weak economy may force the Bank of England to continue to buy
government assets in an effort to pump liquidity into the economy. This
saturation of Sterling
should keep downside pressure on the currency.
A strong retracement rally in the Euro is likely to scare
more than a few of the shorts out of the British Pound which means this market
is ripe for a corrective rally of its own. The current chart pattern suggests
that any decent strength in the Euro over the next few days could trigger a
fast rally to perhaps 1.4810 in the Sterling.
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