Don’t Ignore This Breakdown

  • January 31, 2005
  • Dave Floyd

It has
been a challenging two weeks in the FX markets, as constant
volatility in the dollar and speculation on the G7 meeting seems to be
dominating trading, with few discernable trends making themselves known.  We
came into 2005 with the belief that the dollar was in the midst of a
counter-trend rally, and while it has been bumpy, we still stand by this call. 
Our primary rationale is contracting rate differentials and solid economic
growth.  Technically, there are also some encouraging signs that point to higher
dollar levels.

Nonetheless, our early trades
were roughed up and stopped out as the marketplace still did not share our view
for dollar follow through to the upside.  We have managed the risk well, but
still have taken some losses early on in 2005.  Nonetheless, there is still
evidence, from a macro and technical standpoint that the dollar might be
about to make that much needed break higher.  Next week should offer more clues.

Our other forecast coming
into 2005 was a belief that commodity based currencies, AUD, NZD and CAD would
come under pressure.  Again, the timing has been a bit pre-mature, but with NZD/USD
not making news highs this week, despite solid economic data; we sense that from
a technical standpoint, the NZD is ready to trade lower if the dollar manages to
rally into next week.  The aggressive rate hikes during 2004 have yet to take
hold on the economy but will likely do so in the coming weeks & months.





















A similar situation is
seen in Canada.  The BoC is concerned that the strong CAD last year has damped
economic growth going forward, this has been proven to be a valid concern as
recent economic data is slowing.  Secondly, given that energy, specifically
natural gas, prices have a direct effect on the value of USD/CAD; the recent
technical breakdown in natural gas should not be ignored. 



Looking Ahead:

A busy week, in terms of data
and key meetings. 

 
    
–         
Federal Reserve meets on Tuesday and
Wednesday to discuss rates; rate hike of 25 bp’s likely.

–         
State of The Union speech on Wednesday

–         
ECB meets on Thursday, no rate hikes
seen

 
As always, feel free to send me your comments and questions.


Dave 

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