The Underlying Economic Fundamentals

What was relatively quite week on the U.S economic front created some interesting trading last week. On Wednesday the dollar was met with selling against most other major currencies. The Thanksgiving Holiday here in U.S made for a relatively quite session, but on Friday the markets came back to life with the Euro, Yen, Pound, Aussie all continuing Wednesday’s move. By now most of you should know that I have been patiently waiting these markets to push through key levels and that is exactly what I believe is happening.

In a very general sense the global economy continues to grow at good clip while signs of a slowdown here in the U.S are becoming evident.
Although the CPI and PPI numbers that we got a couple weeks ago below prior readings, in no way were they reason to believe that the Fed will cut rates in the first quarter of next year. In fact, moderating growth via a housing slowdown coupled with the initial effects of higher interest rates give the Fed good reason to keep their target rate unchanged through the spring. In contrast, interest and growth rates in Europe, Asia, and Australia are all on the rise. What does all this mean? The dollar should remain stable while the currencies of growing economies should continue to strengthen, although in the short term expect some type of consolidation.
After several unsuccessful attempts to push through the resistance between 1.28-1.29 the euro finally broke out last Wednesday. After holding above 1.29 for two full days I was finally satisfied with the entry signal on my long trade. We have been waiting for this move for weeks now and it has been quite a profitable move thus far, reaching over 200 pips in 3 days. At this point long term stops are below 1.29 and trailing stops on 1/3 of the position are below 1.30 and 1.3070 respectively.
Just as expected, the cable broke out last week in tandem with the Euro. Replace the resistance near 1.29 with 1.91 and the story is the same. Consecutive closes above resistance have given us strong confirmation of the move and after a brief consolidation I expect further upside for this pair. Long term stops are below 1.92 with partial stops below 1.9290.
After weeks of consolidation below 118.40 this pair finally broke down through support @ 117.25 followed by 116.50. As I have been saying for weeks look for some continued pressure on this pair as a move towards 114 in the medium term is not out of the question. Expect 115.50 to acts as short term resistance as sellers do some profit taking after the recent move. Look for 116.50 to cap any bounce and fade a push through that level with 30 pip stops.
Last week 1.26 held as strong resistance and on Friday the underlying sentiment of this pair was revealed. Previously I had mentioned that I was unconvinced about the strength of support near 1.24 and the market seemed to agree as Friday sellers forcefully pushed through that level. In the short term 1.1950 may provide some support but if this pair falls through that level look to target 1.16 & 1.15.
After getting long last week and taking some profit as this market pushed towards .78, I am now looking to put on the rest of my long position. Just as with the cable and the euro I think there is some good upside potential for this pair and as a result I am keeping stops fairly wide below .7730. I would be a buyer near .7775 with a trailing stop of 30 pips.
USD/CAD: Last week this pair failed below resistance @ 1.15 and as a result, I gave back some of my profits my long position from 1.14. Watch for trend- line support near 1.1275 and 1.12. I remain bullish on this pair, though I am somewhat uncertain as to the timing of the move. Look for further sideways movement before this market can sustain a move above 1.14 and ultimately 1.15.
Derek Frey
Odom & Frey
Call us at 1-866-636-6378

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