Euro Rallies as ECB Holds Secret Talks

The EUR USD confirmed Wednesday’s closing price reversalbottom 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 nextupside target zone.

The EUR USD confirmed Wednesday’s closing price reversalbottom 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 nextupside target zone.

All day long the market was flooded with negative chatterabout the Euro which turned out to be the sign that too many people were shortthe currency. Often times a market will go down until the weakest short puts ona position and this may be the case with the Euro since the whole world hasknown about the debt problems in the Euro Zone since January.

Traders are citing the cause for the reversal in the Euro astwo key events. The first was already mentioned, the huge amount of shorts inthe market. The second was a slightly positive reaction to moves by EuropeanUnion government officials. Although no solid “intel” has come out of the notso secret meeting being held by the EU nations, traders reacted today as if “nonews is good news” and covered their short positions.

Rumors circulated throughout the day about a secret meetingof 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 interventionmay be being considered. An intervention doesn’t make sense because buyingone’s own currency is usually met with equal or greater selling pressure. Aninterest rate cut to zero will help provide liquidity to the Euro Zone but atthe same time signal that the ECB believes there will be no growth in theeconomy.

Whatever happens will definitely contribute to thevolatility in the Euro. This is because investors are screaming for clarity andaction. They are tired of getting half-heartened attempts to shore up theeconomy along with virtually no decisive action. Although EU officials aredownplaying expectations of any effort to underpin the Euro, traders seem to betaking no chances after the recent huge sell-off and are taking money off thetable to protect their profits.

In other action today, traders dumped higher risk assets,driving commodity-linked Forex markets lower while pushing up demand for thelower yielding Japanese Yen.

The lack of clarity regarding proposed regulatorylegislation and the surprise curbing of short sales by Germany madeinvestors nervous. Throughout the entire Greek debt crisis, investors have beenlooking for clarity and conviction from the European Union. Each time the EUhas made a proposal, they have failed to explain to investors the logic behindthe move. This week’s move by Germanyto forbid the shorting of bank stocks is a good example of what is triggeringthe fear in the market today.

Institutions are confused by the action in Germany becausethe regulators have basically changed the rules of the game. Institutions areworried that the proposed changes in U.S. regulations are going to makeit more difficult to protect risky positions in equity markets. What this meansis large investors are unsure how they are going to hedge their exposure in themarkets and instead have chosen to pare back positions to reduce thepossibility of large losses. Without knowing what the regulators are going toallow them to do, it doesn’t make sense to take on added risk so liquidationseems to be the only viable option.

In addition to confusion over regulatory issues, investorsare blowing out of risky commodity-linked currencies because they feel the EuroZone debt problems are going to derail the global economic recovery. This meansthe real possibility of a global double-dip recession.

Hedge funds and large investors continue to divest out ofthe commodity-linked Australian and New Zealand Dollars. Traders feel that thespread of Euro Zone debt woes will curtail the global recovery and lead to a dropin demand for raw materials.

Technically, downside momentum in the Aussie Dollar couldtrigger a sharp decline to 50% of the October 2008 bottom to the November 2009top. 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 ifdownside momentum continues at its current pace.

Falling crude oil triggered a huge rally in the USD CAD. Thursdaymorning surge put this market in a position to take out the recent top on thedaily chart at 1.0738. This is a minor point on the long-term chart. A drivethrough the February 2010 top at 1.0780 is likely to trigger moreshort-covering which will threaten the structure of the bull market in theCanadian Dollar.

As investors dumped higher risk stocks and commodities, theproceeds from the sales flowed back into the Japanese Yen, sending the USD JPYsharply lower. U.S.equity markets finished sharply lower amid concerns the Euro Zone debt crisiswould disrupt the global economic recovery and undermine demand forhigher-yielding assets.

Technically, the Dollar/Yen broke through an uptrending Gannangle/50% retracement cluster overnight, sending this currency pair sharplylower. Based on this month’s main range of 94.98 to 88.25, a pivot price wascreated at 91.61. In addition, uptrending Gann angle support from the Marchbottom at 88.14 came in at 91.58. The plunge through this cluster overnightindicated that stops must have been under this setup. The current chartformation indicates that 91.61 is the new resistance and 89.86 is the nextdownside target.

The GBP USD had very little follow-through to the upsideafter Wednesday’s closing price reversal bottom. Although the reversal bottomwas negated by Thursday’s intraday sell-off, the lack of follow-through to thedownside and the strong comeback rally indicates that sellers are scarce andshorts are still willing to cover at current levels.

Fundamentally, the British Pound is not only feeling thepressure from the collapsing Euro, but traders are also beginning to factor inthe austerity measures the new government is going to propose. Some tradersfeel that the weak economy may force the Bank of England to continue to buygovernment assets in an effort to pump liquidity into the economy. Thissaturation of Sterlingshould keep downside pressure on the currency.

A strong retracement rally in the Euro is likely to scaremore than a few of the shorts out of the British Pound which means this marketis ripe for a corrective rally of its own. The current chart pattern suggeststhat any decent strength in the Euro over the next few days could trigger afast rally to perhaps 1.4810 in the Sterling.

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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