Currency Fundamentals

Last weeks U.S Fed meeting went off without much fanfare. Chairman Bernanke and his crew of regional fed governors gave the markets what they were expecting, an unchanged target interest rate of 5.25%. It appears U.S rates will remain somewhat stable in the near term. The expectations that other central banks around the globe will continue to raise rates should negatively impact the dollar, at least until something changes.

More specifically the central banks of England, Japan, Australia, and the Euro zone have maintained their hawkish posture during recent weeks. If the dollar does in fact weaken against these majors, it may signal a long term sea-change. From a technical perspective the proximity of the dollar to historically extreme levels vs. the euro, pound and aussie could produce some long term trends if it they do in fact break out, just something to keep in mind.
Just as expected the euro caught quite a bid after Wednesday’s policy decision. The 1.25 level held up as strong support and the next level of interest is 1.28 followed by 1.2875. If this pair pulls back a bit I would look add to my long position near 1.2685 with a 30 pip trailing stop. If the current rally does continue unabated I would tighten my stops on a push through 1.28. Even though I am closely watching for possible breakout through 1.29 I am cautious in the near term and will quickly lock in my profits.
At the risk of sounding like a broken record, the pound rallied as expected on Wednesday and is nearing some substantial technical and psychological resistance between 1.90 & 1.91. I am looking for a consolidation of some short in the near term and I am reluctant to add to my current long position at this point. Key support levels are 1.8825 & 1.8730 which should hold unless something significant happens fundamentally.
A second failed attempt to push through 120 was what I believe to be the final gasp of a 6 month move. I am looking to fade this market above 118.05 If this pair can push below 177.40 tighten your stops to lock in some profits. In the event the market really begins to break I would look to take the majority of my position if we approach 116.20.
Early in the week I am looking for a bounce off of Friday’s lows, if those levels hold I would be quick to take profits off the table near 115.60. I am still somewhat unconvinced as to the long term direction of this pair. As a result, I am merely trying to trade quick moves of a day or so. On the downside I would think about buying with a close sell stop after the second bounce near 124.05. Further to the upside I would look to fade this pair near 127.30 with a 40 pip stop and reverse.
The weekly chart has this pair closing in on some substantial long term resistance @ .7900. More recently .7725 to .7775 has served as a key reversal level several times since early 2004. The next round of monetary policy decisions could fundamentally support a rally up through .79. I would be willing to fade a move up towards .7725 for a quick pullback as the market appears to be a bit overextended. If the current move can sustain its momentum look for a entry on the long side.
I continue to look for a continuation of the current uptrend. This pair is now approaching some very evident trendline support, and I will use a bounce off 111.75 to enter the long side. If that level does not hold look for support @ 111.00. Near term resistance is near 112.60 followed by more substantial psychological 114. If the market can move through 114 I would re-enter my long position with a longer term move in mind.
Derek Frey
Odom & Frey
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One Response to Currency Fundamentals

  1. siliconpalms November 15, 2006 at 9:30 am #

    this is a test