Currencies – Reversal Day

After the Pound set a new 52-week high Tuesday on the higher-than-expected US CPI data without the other major currencies confirming the move, the sellers jumped in.  The result was a reversal day to the downside for the major currencies (to the upside for the US Greenback).  As stated last week, the upside momentum is strong and a pullback to the late-April, early-May breakout areas sets up a potential position trade for at least a retest of the past week’s extremes.

Currencies – Buy the Rumors, Sell the News…and repeat

The US Dollar Index (DXC) tumbled to new weekly lows at 8450 with the major crosses including the Euro (ECM6), Pound( BPM6), Canadian (CDM6) and Yen (JYM6) eclipsing recent highs going into the FOMC rate decision news. News of another 25 bps increase initially caught the longs off guard, producing a quick drop to new session lows before reversing to new weekly highs (day session basis) with the Dollar Index setting another low at 8437.

Obviously, the buyers remain the dominant force and until there is a catalyst otherwise, don’t fight the momentum.  The breakout patterns mentioned over the past month remain in effect and continue to be tested.  Due to the continued move higher, support has moved as well. Watch for retracements to the late-April, early-May trading levels for entries with the objectives at the recent extremes. These levels are approximately as follows: DXC 8610-8640, BPM6 18250-18300, CDM6 8950-8970, ECM6 12600-12630 and JYM6 8860-8890.

Forex Update – Pre-FOMC 2-day meeting

With the upside objectives met last week, I suggested that the upside move was nearing a short-term top and the forex and debt markets were setting up for a retracement. A period of stagnation is likely now as the market awaits the results of the two-day FOMC meeting on Tuesday and Wednesday. The news decision will be announced at approximately 1415ET, 05.10.06. A summary of the major crosses follows.

As stated last Thursday, the initial upside objectives for both currencies was tested after strong moves over the prior month. The Pound (BPM6) ran 13.52 pts from the 04.03.06 low of 17284 to Friday’s NFP high of 18636, a 23-day rally. The majority of the move was posted in the last 7 days from 17813-18636 after the Monday 04.17.06 gap up at 17550-17688. Overnight Sunday, it moved to 18700. At a minimum now, expect a consolidation with a potential for a test back down to the breakout area of 17950-18050 realizing that there is a small gap at 18059-18070 from 04.27.06-04.28.06. Aggressive buyers could look for entries in the 18150-18200 area with conservative traders waiting for a test to at least 18075-18125 realizing that the breakout zone is the potential target.

During the same time frame, the Euro (ECM6) rallied 6.89 pts with a Monday 04.17.06 gap at 12158-12262. Its key support zone, the breakout area, is at 12350-12450 with the 12550-12600 area offering initial support for aggressive buyers. Conservative traders should look for the breakout zone test.

The Loonie (Canadian Dollar) broke key support during Monday’s session at 9020-9025. Major overhead resistance is at 9025-9055 with the move setting up a potential break of the past 5-days range of roughly 8985-9090 targeting 8880-8900. The key support zone is at 8920-8950, a potential area for aggressive buyers, with the conservative entry area down at 8875-8900.

Despite the Euro failing to break the NFP high overnight, strength in the Asian currencies forced the US Dollar Index (DXC) through the Friday lows to 8468. The Japanese Yen (JYM6) traded at its highest level since Sept 05 with 8875-9025 now major support on any retracement. Coinciding with the above levels on the major currencies, look for the US Dollar Index to test to 8650-8700.

The bottom line is that a rebound in the US Greenback (pullbacks in the major currencies) is likely into the FOMC news. Likewise, watch for and upside test in the US debt markets to setup short entries. The US T-Bond (USM6) breakdown area is roughly 110 with a test to that area offering a potential short play. Roughly 106-1/2 on the 10-yr notes (TYM6) offers a similar opportunity.

US Greenback – Update

I forgot to mention earlier the fact that similar patterns exists for the Japanese Yen (JYM6) and the Canadian Dollar (a topping pattern), loonie, (CDM6).  For the Yen, a close above 8765 sets begins the up pattern with a close above 8800 confirming the move with an objective of 9200-9300.  For the loonie, a close below 8400 (8350 for conservative traders) confirms a top with a potential targets of 7750-7950.  Note that these levels are for the currencies, not the spot forex – therefore they are inverse.  Stay tuned!