The Underlying Fundamentals

Last week we saw continued weakness on the U.S economic front. The ISM report came in last week at 49.5, the lowest level in three years. This did not bode well for the dollar and it continues to show signs of weakness versus most of the majors. We have been bearish the dollar for quite a while. As oil prices push back into the low to mid 60’s, expect a renewed concern about the spillover from higher energy prices into inflationary measures. What does all of this mean?

We believe a long term trend has begun with the dollar looking weak in the next 3-6months. Although I am somewhat uncertain as to the timing, I do expect a sideways consolidation or some type of pullback in the short term. That being said, I would caution all but the most experienced traders against taking a counter trend position against these recent strong moves. In my opinion the reward does not justify the risk.
Pushing vertical for almost two weeks has this pair looking quite overbought; nonetheless the Euro continues to climb. Last week we caught the long side of this move and were trailing stops below 1.30 and 1.3070. If you haven’t already, make sure to tighten your stops on the majority of your position, the last thing you want to do is get greedy and give back these profits. A quick look at the monthly chart gives us some definite resistance at 1.3350 and 1.355, after that even 1.40 looks attainable if the fundamentals can continue to beat down the dollar.
As with the Euro, be sure to lock in your profits on this almost 600 pip winner. Last week we had our stops @ 1.92 & 19290, and with this pair now testing 1.9750 I would suggest the majority of your position on a trailing stop with the rest long term protected below 1.95. I expect the cable to continue to gain in the long term, though we are quickly approaching psychological resistance near $2.00, expect the market to take notice of that key level.
Last week I said to look for some profit taking as we approached 115.50 and that is exactly what happened. However, we are now on the second bounce off of that level and the market is trying to follow through. If sellers can push this pair below 115.50 look for 115 followed by 114.25 in the short term. If not, look for upside resistance to come into play in the mid 116 level.
After briefly testing upside resistance near 1.21 this pair reversed and resumed its pronounced downtrend. 119.50 is providing a bit of support this morning although I am unconvinced that it will hold. To getter a better perspective of where this pair might be headed look at a weekly chart and you can see some support near 117.50 followed by 115.25, otherwise look for resistance between 1.20 and 1.21 to contain any short term bounce.
The Aussie has continued to push to new ground against the dollar and is becoming somewhat overbought. Long term resistance is clearly evident near .79 & .80 on the weekly and monthly charts, with that in mind I would be very protective of the profits we have had in the past two weeks. Trail stops on at least half of your position with longer term stops below .7775. If this pair does pull back and test .7775, I would look to add to my position at that level after multiple tests of support.
Last week I referenced the trend-line support near 112.75 and this market bounced quite strongly off 113 and rallied all the way to resistance near 114.50. I am patiently waiting for a push through 114.75 to signal a resumption of the uptrend and I would buy a rally through that level with stops below 114.
By Keith Amirault
Odom & Frey
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