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Wednesday May 26, 2010 - 17:37:35 GMT
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Strong Risk Demand Driving Down USD CAD

A sharp rise in U.S. equity markets and crude oil is pressuring the USD CAD this morning. Yesterday’s close below the old top at 1.0738 was the first clue that this currency pair was poised to move lower. Overnight this price was rejected again sending a signal that weaker prices were to follow. With U.S. stock markets expected to continue to rally today and the crude oil chart showing more upside potential, watch for a possible retracement in the Dollar/CAD to 1.0481 over the near-term.


Stronger global equity markets and a little easing of tensions in the Euro Zone are helping to boost demand for the AUD USD. The inability to break to a new low for the year on Tuesday triggered a late session surge which helped form a daily closing price reversal bottom. The follow-through rally overnight confirmed the reversal bottom at .8067, setting up the potential for a 2 to 3 day rally with .8727 a possible upside target.


Traders shouldn’t be looking for a change in trend to the upside in the Aussie, but instead should be watching for a robust short-covering rally due to oversold conditions.


The GBP USD appears to be trying to form a support base slightly above the last swing bottom at 1.4229. A trade over the last top at 1.4527 will turn the minor trend to up. The charts indicate that the main trend is still down, but there is potential for a strong short-covering rally with 1.4810 the next likely upside target.  Fundamentally, unstable conditions in Europe, the threat of a credit crisis and budget deficit issues continue to keep the downside pressure on the British Pound.


The EUR USD recovered overnight after a firm close. On Tuesday, this market successfully tested the low for the year at 1.2143, triggering a short-covering rally. If this low holds, then it will mean that last week’s reversal bottom is still intact while indicating that buyers have stepped in to support the currency.


The best sign that a bottom is being formed and that Tuesday’s action was a successful test of the low will be the regaining of the Fibonacci retracement level at 1.2345. Holding this level could trigger a further rally to the 50% price at 1.2407. Building a fresh support base in this price zone will be a sign of higher markets to follow, but the main trend will not change to up until 1.2671 is taken out.


A break though 1.2143 will indicate that further downside movement is likely with the early 2006 price at 1.1825 the next likely downside target.


The main catalyst behind the weakness in the Euro is concern that Europe’s sovereign debt issues are spreading, threatening the global economic recovery.


Traders have been selling the Euro since early Sunday evening when Spain took over a struggling financial institution. The move accelerated to the downside after the International Monetary Fund said Spain has been too slow to strengthen its banking system. This statement by the IMF helped create uncertainty in the market leading to the current sell-off.


Technically, the Euro is oversold, but it is going to take an easing of concerns in the Euro region before any of these oversold indicators will have any relevance.


Tuesday’s action was the first sign that actual buyers may have entered the market. This usually happens after the type of reversal we saw last week. Following a prolonged move down in terms of price and time, the first leg up is usually short-covering. The first leg up is 1.2143 to 1.2671. Following a test of a retracement zone or the actual bottom, the next leg up is usually new buyers.


At this time, oversold conditions are battling the bearish fundamentals. In other words, traders know the fundamentals are bearish, but can’t seem to muster up the courage to short this market again and again at such extremely low levels. Since the Euro is in a long-term decline, traders must get used to the possibility of whip-saw conditions at times while facing huge retracements.


Watch for the Euro to try to build a base between 1.2407 to 1.2345 then make a run at 1.2671. A breakout over this level is likely to trigger a massive short-covering rally to about 1.2917.





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