The Underlying Fundamentals

In the last few sessions, the U.S Dollar fought back against most major foreign currencies, something we haven’t seen in a while. However, the somewhat unexpected strength exhibited by the U.S. Dollar did not bring the currency to new highs; it simply retraced some of the ground lost since late November. In fact, several of the major pairs ended the week in very close proximity to the levels from which the recent move began. Why the sudden change?

Take a minute to think about the state of U.S labor market I discussed in last week’s update; it should help clarify the situation. In the current uncertain economic environment our Federal Reserve is scrutinizing every new set of economic data, especially those pieces which pertain to the health over the labor market. This scenario is important to the trader because each new report has the ability to change the outlook for domestic interest rates, which in turn impacts the foreign exchange market, sometimes markedly.
Unfortunately, recent economic data has been anything but consistent. In fact, the only thing that remains somewhat stable is the expectation that similar indicators will be conflicting, and that those same numbers will then be revised at some later date. Go Figure. So, for those traders looking for a quick explanation of this week’s 300pip move, this is for you.
On Tuesday, the ADP labor report came in below expectations and those numbers suggested the labor market might be slowing. That report changed market expectations and many major moved sharply higher versus the dollar. However, for the rest of the week the moved higher and its strength was bolstered by on Friday by a strong NFP report. Once again the two reports contradicted each other; in essence they created two totally different outlooks for both the U.S economy and the Fed’s target rate.
What does all this mean to the trader? To be successful in the midst of such uncertainty and volatility it is imperative to properly manage your risk. Be sure to utilize position size limits, stop loss orders, and protective option strategies to ensure help that one or two bad trades won’t hurt your overall portfolio.
The cable broke down through support near 1.95 and corrected all the way down to 1.9275. If this short term decline continues, look for strong support to come in around 1.91-1.92. Even though I am bullish this pair based on longer term time frames and fundamentals, I would still wait to see a reversal off the lows before getting back in on the long side.
As usual the Euro and the Pound are behaving very similar to each other, as this pair broke down through 1.31. Strong support for this pair remains near 1.29- 1.28.60, though I would recommend that traders wait for a bounce before going long. Resistance is now 1.3050 and nimble traders could try and short that level with tight stops.
For the past few weeks I have been favoring the short side of this pair between 119.30 & 119.50. That resistance zone has remained intact but in the last few sessions the volatility has increased dramatically, and this has made it challenging to stay on top of. I still favor the short side of this pair though until volatility quiets down I would suggest using smaller positions.
This pair has been unable to break the 1.24 resistance and until a move above that level occurs the short side remains the most attractive. A break above that level could signal a change in trend and I would look to go long with stops below 1.2330.
The Aussie reversed violently after breaking out above .7900. A move like that is a perfect case for using trailing stops on a break out. If that move were going to continue buyers should have been able to hold .79 and with such a strong reversal the day after breaking resistance longs should have become cautious. Short term support is .7750 followed by .7650.
This pair continues to climb and the long side of this pair has been one of our best positions. Even though the long term trend is definitely up, this pair is becoming extended at the current levels so protect profits with stops below 1.1725 & 1.1650.
Keith Amirault
Odom & Frey
Call us at 1-866-636-6378

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