These Are The Better Trades

  • September 28, 2004
  • Dave Floyd

The Week Ahead:

With Conference Board
Confidence, GDP, Chicago PMI all due out this week, there is certainly ample
data to allow the FX markets to establish a trend that lasts for more than 1
day.  Nonetheless, all this data may simply be overshadowed by the G7 conference
that starts on Friday.  Let’s review a possible statement that might be
communicated, and its’ impact.

 
–         
With the US current account balance
widening it is possible to see a return to the February & April statement which
seeks currency flexibility. 

The result would likely be a
sharp depreciation of the dollar most likely against the EUR and GBP.  While
some depreciation may occur against the JPY, it is unlikely given the BoJ and
the fact that the Japanese economy is not as robust as it was back in February
when the JPY bore most of the fallout from the G7 statement.

The ECB talks up or
down the value of the EUR rather than direct intervention.  With exports holding
in well at current exchange rates, the ECB will be keen on avoiding a sharp
increase in EUR/USD.

Statement from  February and
April 2004:

“We reaffirm that
exchange rates should reflect economic fundamentals. Excess volatility and
disorderly movements in exchange rates are undesirable for economic growth. We
continue to monitor exchange markets closely and cooperate as appropriate. In
this context, we emphasize that more flexibility in exchange rates is
desirable for major countries or economic areas that lack such flexibility to
promote smooth and widespread.”

 
Technical Notes:

In an email I sent to clients
of my FX Service yesterday, it was a clear case of “contra deja-vu” yesterday. 
Friday’s steep gains in the dollar were nearly wiped out as traders decided to
focus on the weak housing numbers.  At this point, discerning what the market
thinks of the data is futile, if and only if the market breaks this ever
tightening range will I seek to expose myself to much risk. 

While the non-dollar pairs are
not immune to the erratic price action, they are not as closely correlated to
the whipsaws in the dollar.  I have begun to focus on these charts for possible
trades.

EUR/JPY:  both the daily and
60-minute charts are showing some decent patterns.  The break above the daily
trend-line and the solid wave pull-back on the hourly chart offered a good long
set-up as mentioned in yesterdays article.  It did top out at the noted
resistance level, but short-term traders should be on the lookout for long
entries going forward.  Next major resistance is seen at 137.86 (May high) while
137.05 (July 2003 weekly break) will also provide resistance. 








Overnight News &
Developments:

Market continues to focus on
10-year Treasury yields <4%, oil and sagging equity prices.  Now dollar is under
pressure as is the Yen as higher oil prices go right to that nations bottom
line.

Crosses continue to be the
better trades as dollar based pairs continue whipsaw action.

Keep an eye out at 7 AM PDT for
September Consumer Confidence, consensus estimates are for a reading of 99.5.

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


Dave