Drop in Gold and Crude Oil Triggers USD CAD Breakout Rally

The fall in the price of gold and crude oil helped drive theUSD CAD sharply higher Wednesday morning. After changing the trend to up on thedaily chart on Tuesday following the breakout over the last swing top at1.0215, bullish traders set their sights on the March 26th top at 1.0302.

The fall in the price of gold and crude oil helped drive theUSD CAD sharply higher Wednesday morning. After changing the trend to up on thedaily chart on Tuesday following the breakout over the last swing top at1.0215, bullish traders set their sights on the March 26th top at 1.0302.Upside momentum took this price out fairly easily, taking out stops on thepenetration. The rally continued until just before the major 50% level at1.0366. At this point, gold and crude began to rally and weak shorts began totake profits. At the close, the Dollar/CAD was higher for the day but well offits high.

Weaker gold, crude and equities should help to trigger afurther rally in the USD CAD. After building a support base in April, this pairappears ripe for even stronger upside movement. Gold may rally because ofhedging against the demise of the Euro; this may help to limit losses in theCanadian Dollar.

The weakening Canadian Dollar is most likely pleasing to theBank of Canada which hinted last week that a strong currency is likely to havean impact on inflation and monetary policy. This led this analyst to believethat the BoC was intervening to weaken the Loonie. Look for the USD CAD tocontinue to strengthen unless there is renewed demand for higher risk assets.

The U.S. Dollar gained ground against most major currencieswith the exception of the Japanese Yen on Wednesday boosted by demand for saferassets. The Dollar Index continued its six month rally, touching its highestlevel since May 2009. Today’s strong drive to the upside took out a .618retracement level at 83.72. Continue to look for higher prices as longconditions remain chaotic in the Euro Zone. Technically, it would be nice tocontinue to hold above 83.72 now that this level has been broken, but the mostimportant support level is 81.90.

The EUR USD fell over 1% early in the New York session as fear swept the Forex markets on concerns that Portugal and Spainwould become the next Greece.The Euro was weak from the opening but the break accelerated to the downsideafter videos of unrest in Greecewere broadcast worldwide.

Traders were able to witness firsthand the clash between Greekpolice officers and workers over financial cuts. The demonstrations against theGreek government’s austerity measures even led to three deaths. Among theeconomic concessions ordered are wage cuts for public workers, a freeze onpensions and a second sales-tax increase. Some believe that Germany is behind these drastic cuts as a showof power against Greece.

As part of the new bailout agreement with the InternationalMonetary Fund and the European Central Bank, Greece was required to make severebudget cuts in order to qualify for the loans. The demonstrations hurt thecredit markets against Greece,thus leading to hard pressure on the Euro. The currency plunged sharply lower throughoutthe session as hedge funds and large speculators continued to press it in theabsence of seemingly any bids.

Shortly before the mid-session and after reaching a low of1.2803, oversold conditions and a short-covering rally in the equity marketstriggered a turnaround n the Euro, but this move failed to take the market awayfrom the strong hands of the short traders. Although at one point upsidemomentum looked as if it was going to produce a closing price reversal bottom,all the market could muster was a 50% retracement of the day’s range.

Aggressive traders now expect further downside action ascontagion fears are sweeping the Euro Zone. Most investors expect furthererosion of support as Moody’s is expected to slash the credit rating of either Spain or Portugal over the next two days.

On Thursday the European Central Bank will hold its monetarypolicy meeting. Traders expect interest rates to remain unchanged. The policystatement is expected to address that fact that rates will remain low for anextended period of time as the Euro Zone will need time to sort out itsfinancial mess. ECB President Trichet is also expected to address the problemsin Greece, Portugal and Spain. In his post-meeting speech,he is most likely going to try to boost the confidence of Euro investors.

The weak Euro sent the USD CHF sharply higher. Traderscontinue to expect the Swiss National Bank to intervene to defend its currency.Based the 12-month range of 1.1965 to .9918, the market is now trading insidethe retracement zone of this range at 1.0914 to 1.1183. Look for this pair tocontinue to strengthen as long as the low end of the range holds with the upperend the next objective.

A flight to safety rally triggered by falling equity andcommodity prices helped to drive down the USD JPY. After failing tofollow-through to the upside through a former main top at 94.77, this marketturned around and changed the trend to down with a move through 93.93. Thecharts indicate the next downside level is 93.08 to 92.73. The movement in theequity markets should continue to dictate the direction of the Japanese Yen.

The GBP USD finished lower but off its bottom. The BritishPound traded sharply lower Wednesday morning as it fell in sympathy with theEuro. Other than the weakness triggered by the Euro this morning, the tone inthe Sterlingseemed to be a little more upbeat as investors began to factor in thepossibility of a victory by the Conservative Party following the May 6thelection. Traders are also beginning to accept the notion that no matter whichparty wins the majority of the parliament, austere financial measures will haveto be enacted in order to tighten up the U.K. budget and shore up its debtor risk a possible downgrade by the credit rating services.

The GBP USD was trading better overnight as investorsincreased bets on a victory for the Conservative Party. No matter how the electionpans out, traders are counting on the new government to mount a steady attackon the country’s huge budget deficit. This may mean the implementation of newtaxes and austere cost slashing. U.K. voters realize that either aConservative Party or Labour Party victory will mean aggressive action willhave to be taken in order to avoid the same fate as the Euro Zone economies.Last week, both the S&P and Moody’s credit rating agencies said that a debtrating cut is likely depending on how the new government chooses to attack thecountry’s fiscal problems.

Technically, the British Pound tested a retracement zone at1.5163 to 1.5078. Additional support was being provided by an uptrending Gannangle at 1.5087. The main trend is down, but this market appears ripe for ashort-covering rally. A move above 1.5163 will indicate strength.

The AUD USD was under pressure due to renewed weakness inthe U.S.equity markets. Early Tuesday night the Reserve Bank of Australia hiked its benchmarkinterest rate as expected by 25 basis points to 4.50%.

Based on comments from RBA Governor Glenn Stevens, this islikely to be the last rate hike for a while. Stevens feels that the RBA hasreached its objective by bringing rates back to normal between 4.50% and 5.00%.He further added that he feels inflation was likely to remain in the upper halfof the RBA’s target range.

Besides the weakness in the equity markets overnights andthe falling demand for higher risk commodities, traders also remain a littlecautious as to whether a tighter monetary policy in China will curtail demandfor Aussie goods and services. Based on the main weekly range of .8577 to.9387, traders should look for the Aussie to correct to .8982 to .8886.

The NZD USD fell in sympathy with the Australian Dollar anda lack of demand for higher yielding assets. Based on this week’s policystatement by the RBA, many traders now feel the Reserve Bank of New Zealandwill wait until the second half of the year before raising rates.

The chart formation suggests that .7199 is a key pivotnumber, followed by .7163. The main trend is up and does not turn down unlessthe swing bottom at .7052 is taken out. The first clue that a change in trendis imminent will be the breaking of a long-term uptrending Gann angle at .7121.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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