Underlying Fundamentals

Last week the main story for the U.S Dollar was Friday’s NFP report. Contained within the report was an upward revision for the prior two months’. This adjustment added 42,000 jobs and painted an unexpectedly resilient picture of the U.S Labor Market. However, keep in mind that a tight labor market can contribute to inflationary pressures, and it is imperative to examine the changes in wages.

Last week the increase in hourly wages was 0.2%, just less than the expected 0.3% increase, and this helped ease the inflationary concerns just a bit. The relatively tame increase in wages and the recent up- tick in overall productivity continue to lead the economy down the fine line between recession and recovery. On the other hand, during this transitional period there are some global factors that may continue to pressure the dollar.
Stable inflationary expectations and a modestly strong labor market have reduced the probability of a first quarter rate increase in the U.S. Contrast that scenario with a greater chance of rate hikes in the Euro Zone, Japan, and England and the recent sell off in the dollar makes more sense. Strangely, just hours after the bearish NFP report on Friday morning the markets seemed to forget these factors. Treasury secretary Paulson said in a live interview that a strong dollar was in the best interest of the U.S. Shortly thereafter, the dollar caught quite a bid and the day’s early weakness was washed away in a flurry of dollar denominated buying. To the uninitiated, it would seem that with the support of the U.S Government, the strength of the dollar is not in jeopardy. However, it is important to remember that attempts to manage the range of any globally traded currency have failed, that is with one exception, China.
In my opinion, the global marketplace has yet to fully comprehend the scope of the situation, and to be honest I too am somewhat uncertain about where our economy will be in the next 6-12 months. Given all of what I just said, it is of utmost importance that our clients, whether short or long term, intraday or swing, focus on one thing; managing their risk.
The Cable experienced quite a bit of profit taking last week. This pullback was not a surprise after the pair rallied nearly 800 pips in the last month. Given the underlying fundamentals, I expect further gains for this pair, however, wait for a reversal before re- entering the long side. There was a brief consolidation starting with the gap near 1.9320 so look for some support in that area. On the upside buyers have to establish a new high if the trend is to remain intact.
The Euro has some visible support between 1.3080 and 1.3130 from the gap and short consolidation that followed. That support level is an attractive place to go long, though be sure to keep stops tight as a break below this short term support could trigger signal further downside. If buyers cannot hold the current range the next level of interest all the way down @ 1.2950.
The Yen bounced back on Friday after failing to sustain a push below 115, a key psychological level. Although I continue to favor the downside, I will trade the range from 115-117 until sellers can push to new lows. Keep stops tight and don’t put your whole position on at once, this will help you manage the risk when opening the trade. Wait for the longer term trend to follow through before putting committing more capital.
Profit taking supported this pair and helped retrace some of the recent drop. Resistance is just above current levels @ 1.2120 and should contain any additional upside. I am looking to short this pair above that level with stop and reverse orders. The lack of any additional resistance up to 1.2230 increases the risk of that particular entry so trade a smaller position until given confirmation.
For the past few weeks I have been using the Aussie’s weekly and monthly charts for my analysis. On those charts .79 is a prominent long term resistance level, and for the second week in a row sellers remained above .7880. In the short term look for support near .7730-50 as a good place to go long with conservative stops.
Resistance at 115 remains the key level for this pair, though I do expect a move up through that level in the short term. There is good support between 114 & 114.50 and we do pullback I would use that level to position for what I expect will be a follow through to the recent rally. If and when a push through 115 occurs, I will put on some additional size with a tight stop below 114.70.
Keith Amirault
Odom & Frey
Call us at 1-866-636-6378

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