This Bear Flag Says Lower Levels May Be At Hand

  • March 21, 2005
  • Dave Floyd

It was
an interesting week in FX.  As mentioned in emails earlier, I have
been reluctant to take on short-term trading positions due to market conditions;
it would appear this has served us well, as most moves have appeared obvious
only after the fact.  Other traders I speak to also echo similar sentiments.

Nonetheless, our open
positions, all from around March 8th are either in the black or are
nearly so at present.  Most impressively the AUD and NZD have remained firm and
edged higher as we closed out the week.

Longs: 
AUD/USD, NZD/USD, EUR/CHF, EUR/GBP & CAD/JPY

Shorts: 
no shorts currently

Looking ahead, the dollar will
continue to be key, as each day it threatens to break to recent lows or recent
highs, it has been quite challenging to say the least.


While we are near-term bullish on the AUD/USD due to rate differentials, rising
commodity prices and a general feeling that the dollar will trade lower, we also
recognize some negative developments in Australia that are worth noting. See
chart below:

 



So while we remain focused on our
long AUD/USD, we are also considering a short in AUD/CAD as a way to play this
without having to worry about the erratic gyrations in the marketplace. Canada,
purely on a relative basis, is not showing the same deterioration that Australia
is.


“If interest rates were to move up 200 to 300 basis points, would
people be in trouble? The answer is no, we would still have debt service ratios
well below the national average of the past

20 years.”

David Dodge

Governor of the Bank of Canada

“Manufacturing shipments in Canada
rose by 3.0% in January, a spectacular increase that far exceeded even the most
optimistic forecast by a significant margin. New orders and unfilled orders were
also very strong. Canadian manufacturing shipments are highly correlated with
retail sales in the U.S., which are rising at the present time.”
Source: BCA Research


When viewed from this and the technical backdrop, we see a convincing reason to
establish short in AUD/CAD in the near-term.  The bear flag on the daily chart
is one sign that lower levels might be at hand, but we also see a clean break of
the 50 & 200-day emas too.





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


Dave

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