The so-called commodity currencies may lead the majors in correcting the recent surge in US Dollar strength. While the Euro and the British Pound continue to sell off aggressively against the greenback, the Australian, New Zealand, and Canadian dollars are showing candlestick formations indicative of a near-term correction of USD strength.
EUR/USD Euro selling continues We sold EURUSD at 1.5510 having identified a Long Black Candle that closed beyond trend line support. The pair is now trading at the 1.4120 level, bringing our floating profit to around 1,390 pips. Most recently, prices penetrated below a trend line that had remained in place since March 2006. The 1.40 level may present formidable psychological support, but we remain firmly bearish in the long term. The next soft target is the July 2007 top near 1.3860. EUR/USD Strategy 1. Continue holding short EURUSD at 1.5510. 2. Move stop-loss to 1.4994, protecting 516 pips in profit. 3. Next “soft target” lies near 1.3860. For more resources on the EURUSD, please visit the DailyFX Euro Currency Room. GBP/USD Bearish momentum remains undeterred The British Pound has fallen precipitously against the US Dollar. Indeed, the pair has fallen more in the last 2 months than throughout the course of 2005, the last prolonged period of dollar strength. The pace of the decline has been so profound that identifying an attractive entry point has proven difficult. Chasing the trend with a short at current levels is dangerous from a risk-reward perspective. Price action has now traded to a trend line in place since 2001. The long-term trend bias favors bears as the interest rate outlook for 2009 calls for Sterling weakness (bond yields forecast rate hikes for the Fed and rate cuts for the Bank of England). We will look for a corrective bounce to offer a reference point for risk-reward analysis and present a short entry opportunity. GBP/USD Strategy Flat. Updates will be posted throughout the week at the Candlestick forum. For more resources on the GBPUSD, please visit the DailyFX British Pound Currency Room. USD/JPY Yen alone in gains against the Dollar Last week, we noted that USDJPY could diverge from US dollar strength seen in the other majors with the pair trading in a Rising Wedge formation confirmed by negative divergence with the Slow Stochastic oscillator. Indeed, USDJPY broke below wedge support last week even as the greenback scored gains across the remainder of the forex spectrum. We have since seen a pullback to re-test support-turned-resistance, with the next move favoring further downside from a purely technical perspective. That said, we continue to see a need for restraint in trading this pair. USDJPY has been closely correlated with the overall direction of risk sentiment in recent months, so price action may be vulnerable to knee-jerk volatility as the market digests news of the Fannie Mae / Freddie Mac bailout by the US Treasury. We will remain on the sidelines for the time being as prices yield further confirmation. USD/JPY Strategy Flat. Updates will be posted throughout the week at the Candlestick forum. For more resources on the USDJPY, please visit the DailyFX Japanese Yen Currency Room. USD/CAD Bulls run into key resistance The US dollar has run into a considerable hurdle against its Canadian counterpart. Last week, we suggested USDCAD had found resistance at a trend line in play since May 2004. We now see this resistance as being substantially reinforced as it appears that it coincides with a multi-month top dating from 06/15/07-08/31/07 as well as the upper boundary of a Wedge formation originating in October 2007. The weekly chart is showing a Shooting Star formation which may be indicative of a reversal. Of note, this is generally considered a weaker signal and requires confirmation on the close of the current candle. Our fundamental perspective as discussed in the Q3 Quarterly Canadian Dollar Forecast continues to favor USDCAD strength, so we will remain on the sidelines as we look for a pullback to offer a long entry opportunity. USD/CAD Strategy Flat. Updates will be posted throughout the week at the Candlestick forum. For more resources on the USDCAD, please visit the DailyFX Canadian Dollar Currency Room. AUD/USD Major support may prompt upside correction Last week concluded with the Australian dollar closing below a major supporting trend line in place since September 2001. Price action is now standing squarely above a multiple support/resistance level and psychological barrier at the 0.80 level. Ideally, we would like to see a bounce here to offer more attractive risk-reward parameters. That scenario is bolstered by a bullish Inverted Hammer showing for yesterday’s candle on the daily chart (not shown). That said, we will look to short the pair should trend support at 0.80 give way. AUD/USD Strategy Flat. Updates will be posted throughout the week at the Candlestick forum. For more resources on the AUDUSD, please visit the DailyFX Australian Dollar Currency Room. NZD/USD Trend line broken, but is a bounce approaching? New Zealand dollar positioning looks very similar to that of its larger antipodean neighbor. Last week saw prices break below a major supporting trend line in place since September 2001 to find support in a key price congestion region around the 0.6660-0.6670 area. As with AUDUSD, our ideal scenario is a bounce here to offer more attractive risk-reward parameters. An Inverted Hammer on the daily chart (not shown) lends credence to this possibility. Sill, a break past current resistance will warrant a short as the NZDUSD bearish trend continues to unfold. NZD/USD Strategy Flat. Updates will be posted throughout the week at the Candlestick forum. For more resources on the NZDUSD, please visit the DailyFX New Zealand Dollar Currency Room. To contact Ilya regarding this or other articles he has authored, please email him at ispivak@dailyfx.com