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Currency Crosses: Technical Outlook 05-12

Currency Crosses: Technical Outlook 05-12

2010-05-12 21:28:00
Jamie Saettele, CMT, Sr. Technical Strategist

 Euro / British Pound

I wrote last week that “the exceptional rally today offers an opportunity to go with the larger trend.”  The entire rally has been almost entirely retraced.  The rally from the low (8427) is not an impulse, but neither is the decline.  A triangle, flat or some complex correction is underway.  Expectations are for higher prices then.  8650 is initial resistance.
The EURCAD is closing in on a Fibonacci extension at 12770 and the 1997 low at 12450.  Bigger picture, 12 rate of change is at the lower end of its historical range and the EURCAD has broken below a MAJOR head and shoulders neckline.  The extreme rate of change reading warns of a pullback.  In summary, look for a low to form over the next few weeks.

The EURAUD finds itself closing in on the 1997 low of 14010.  A doji on the weekly (last week’s candle) warns that a low may be forming.  Like the EURCAD, 12 month rate of change is at the lower end of its historical range.  In fact, there have only been 2 instances when the RoC was lower – spring/summer 1981 and late 1988/early 1989.  Both instances led to the formation of major lows (this is the 16th consecutive down month for the EURAUD).  

I wrote last week that “the range this week is the largest since October 2008.  The EURJPY traded in a 1500 pip range for several months following that bout of volatility.  Something similar may happen here.  Look to trade a large range.”  There is also the potential for a long term inverse head and shoulders pattern.  Regardless of that pattern, I do expect a test of last week’s low.  How soon is difficult to assess.  In 1998, the Asian crisis resulted in a test of the spike low 3 weeks after the initial plunge (then additional consolidation followed by a resumption of weakness).  In 2008, the low was tested the next week.  Using history as a guide, I expect a test of the low before several months of consolidation.    

British Pound / Japanese Yen
Similar to the EURJPY, I expect a decline from current levels to lead to a test of the low at 13000.  In EW parlance, a drop to a new low should complete 5 waves from 14600.  Expectations would then be for a recovery/consolidation that lasts for several months.  This analysis fits with my expectations for the EURJPY.

Canadian Dollar / Japanese Yen
Very big picture, the rally from the 1995 low is in 3 waves – this is bearish (3 waves move against the trend) and suggests that we should look to short large rallies.  The nearly 3000 pip rally from the 2009 low qualifies.  What’s more, a former resistance line pinpointed the top of the rally earlier this month.  As is the case with the other Yen crosses, I favor the downside and a test of last week’s low.  9200/40 is additional resistance if needed.

Australian Dollar / Japanese Yen
The AUDJPY picture is bearish also.  The rally from the 2008 low (5500) reversed right at the 61.8% retracement of the prior decline (just as the Dow did).  20 day rate of change is now negative after sporting divergence for months.  Near term expectations are for a test of last week’s low before additional consolidation.  8575 is resistance if needed.
Jamie Saettele publishes Daily Technicals every weekday morning, COT analysis (published Friday evenings), technical analysis of currency crosses on Monday, Wednesday, and Friday (Euro and Yen crosses), and intraday trading strategy as market action dictates at the DailyFX Forum.  He is the author of Sentiment in the Forex Market.  Follow his intraday market commentary and trades at DailyFX Forex Stream.   Send requests to receive his reports via email to jsaettele@dailyfx.com

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