Dollar Bounce? Here’s The Play…

As we hit the midpoint of the month it appears clear that there will
be plenty of opportunities for FX markets to provide clues as to further
direction. We remain cautious on trading the EUR/USD, USD/JPY and GBP/USD and
prefer some of the crosses and commodity based currencies, specifically the AUD/USD.
The USD/CHF is also appealing given its’ oversold condition. With inflation data
due out this week and TIC data due tomorrow, there should be plenty of catalysts
to start some moves.

What remains interesting is the continued disconnect of the dollar from some of
the solid economic data emitting form the US. Granted, the dollars demise lately
has been deficit related, but it also brings into question which market is right
about the path of the economy. The bond and FX markets or the equity market? The
equity market remains firm after breaching some solid technical resistance last
week while the 10-year bond yield is lower now then when the Fed started
tightening. Meanwhile the dollar continues to make lows.

Rather than debate the analyze this situation, let’s simply boil it down to a
few paragraphs simply for illustration and then focus on the technicals as a way
of avoiding opinions getting in the way of trading profits.

The equity markets are clearly sensing that there are some underpinnings
developing for a sustained recovery. Extended, perhaps permanent tax relief,
peaking oil prices, an acceptance of a weaker dollar on behalf of the
administration. These are good things for equity investors.

The FX markets look at these same items and draw a different conclusion. Mainly
that the acceptance of a weaker dollar will usher in just that. That, combined
with a continued poor fiscal situation adds more fuel to the argument. However,
one thing is becoming clear, global growth is showing signs of slowing, and the
question is will it eventually catch up with the equity markets? GDP reports
last Friday from Europe and Japan were much lower than expected, blips on the
screen or the start of a trend?

Slower growth worldwide would argue that the current trend of the dollar remains
lower. While we agree with that assessment, current negative bias towards the
dollar appears stretched. There have been too many mainstream media pieces
recently regarding the decline of the dollar and many financial talk shows have
an increased number of callers with dollar forecasts. The result, as we have
been indicating, is that a short-term bounce in the dollar might be at hand. Our
pick is to look at the USD/CHF to play this.

Technical Notes:

EUR/USD: with 1.3000 looming large, short-term models show erratic trading,
offering no clear edge for short-term trades. Daily chart, while bullish shows a
few technical signs that 1.3000 will not be breached on this run, those mainly
being weakening momentum indicators and a declining MACD. Intra-day traders
should note 1.2890 as support.

USD/JPY: On Wednesday it appears that the break of 106.10 would usher in higher
levels. However, true to its form, the Yen remains an illusive and trick
currency to trade with a sharp sell-off late in the week back towards 2004 lows
at 105. Short-term model shows 105.55 as solid resistance for short entries. The
105 level with be key as many suspect the BoJ will be gearing up to mark a line
in the sand.

GBP/USD: looking to re-test 1.8600 after support held at 1.8521 overnight. Still
do not see much upside at this point, as price action remains choppy, but buy
stop above the 1.8600 level might propel higher than we anticipate

USD/CHF: stochastic divergence on daily chart, momentum beginning to turn
higher, are all signs that we might be starting to form a bottom. Given the
extreme bearish bias towards the dollar, this pair is poised for a decent pop if
we get a catalyst. What that catalyst is remains to be seen, but if we let the
technical levels guide us, we should be able to capitalize. Look for possible
long entries for short-term traders on any pullbacks to 1.1740, while
longer-term traders should watch for a break towards 1.1843.

AUD/USD: the grind higher continues, much to our dismay, as we have not been
able to get a decent enough pullback to warrant a long entry. A move towards
.7800 should cap the rally, as many Australian corporates would be happy to sell
there for hedging purposes. Intra-day levels are seen at .7680 and .7750.
Support on daily is seen at .7540

EUR/JPY: weekly trend-line continues to fight off longs in this one. However,
with higher lows on the daily chart, it seems like only a matter of time before
this one takes off. Daily chart shows good support at 135.92 (bear trend-line)
and 135.76 (50-day ema) with weekly trend-line resistance seen at 137.50.
Intra-day levels are seen at 136.75, 136.21 and 137.15

Open Positions: