Strong Risk Demand Driving Down USD CAD

A sharp rise in U.S. equity markets and crude oilis pressuring the USD CAD this morning. Yesterday’s close below the old top at1.0738 was the first clue that this currency pair was poised to move lower.

A sharp rise in U.S. equity markets and crude oilis pressuring the USD CAD this morning. Yesterday’s close below the old top at1.0738 was the first clue that this currency pair was poised to move lower.Overnight this price was rejected again sending a signal that weaker priceswere to follow. With U.S. stock markets expected to continue to rally today andthe crude oil chart showing more upside potential, watch for a possibleretracement in the Dollar/CAD to 1.0481 over the near-term.

Stronger global equity markets and a little easing oftensions in the Euro Zone are helping to boost demand for the AUD USD. Theinability to break to a new low for the year on Tuesday triggered a latesession surge which helped form a daily closing price reversal bottom. Thefollow-through rally overnight confirmed the reversal bottom at .8067, settingup 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 theupside in the Aussie, but instead should be watching for a robustshort-covering rally due to oversold conditions.

The GBP USD appears to be trying to form a support baseslightly above the last swing bottom at 1.4229. A trade over the last top at 1.4527will turn the minor trend to up. The charts indicate that the main trend isstill down, but there is potential for a strong short-covering rally with1.4810 the next likely upside target. Fundamentally, unstable conditions in Europe,the threat of a credit crisis and budget deficit issues continue to keep thedownside pressure on the British Pound.

The EUR USD recovered overnight after a firm close. OnTuesday, 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 thatlast week’s reversal bottom is still intact while indicating that buyers havestepped in to support the currency.

The best sign that a bottom is being formed and thatTuesday’s action was a successful test of the low will be the regaining of theFibonacci retracement level at 1.2345. Holding this level could trigger afurther rally to the 50% price at 1.2407. Building a fresh support base in thisprice zone will be a sign of higher markets to follow, but the main trend willnot change to up until 1.2671 is taken out.

A break though 1.2143 will indicate that further downsidemovement is likely with the early 2006 price at 1.1825 the next likely downsidetarget.

The main catalyst behind the weakness in the Euro is concernthat Europe’s sovereign debt issues arespreading, threatening the global economic recovery.

Traders have been selling the Euro since early Sundayevening when Spaintook over a struggling financial institution. The move accelerated to thedownside after the International Monetary Fund said Spain has been too slow tostrengthen its banking system. This statement by the IMF helped createuncertainty in the market leading to the current sell-off.

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

Tuesday’s action was the first sign that actual buyers mayhave entered the market. This usually happens after the type of reversal we sawlast week. Following a prolonged move down in terms of price and time, thefirst 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 isusually new buyers.

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

Watch for the Euro to try to build a base between 1.2407 to1.2345 then make a run at 1.2671. A breakout over this level is likely totrigger a massive short-covering rally to about 1.2917.

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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