The US Unemployment Report showed stronger job from a Non Farm Payroll and Private Payroll perspective with the Private job growth showing the highest gain since February 2006.  The Unemployment rate, however, upticked to the psychological 9% level.  I don’t know what it is but if it was 8.9% instead of 9%, what a diffference it would have made to consumer confidence.  The 9% will not look good in the business press tomorrow or on the Sunday talk shows. 

The dollar rallied initially but then lost some of its luster as the longs seem content to cover some positions going into the weekend.

Against the EURUSD , the price held channel trendline support (see chart below) soon after the report release and bounced higher. The level is still in play and a move below either today or next week keeps the corrective move in place that could see the price move to the 1.4150 level over the longer term.  The move in the first 4 months of the year took the pair from 1.28 to 1.49.  The catalyst was higher Euro rates, steady US rates. Yesterday’s Trichets more sanguine comments opened the door the correction lower.  There is room to roam to the downside given the sharp trend move higher.  Damage was done yesterday that could lead to a larger corrective phase over the next few weeks.

The GBPUSD fell below neckline support (head and shoulder formation in the chart below). Staying below the neckline trendline would be the most beneficial development for further downside momentum. What would also be supportive if commodities can continue correction and the speculation squeezed out of the market. This should ease headline inflation in the UK and justify the BOE “no change” policy.  Like the EURUSD, the GBPUSD has moved sharply higher in 2011. At the end of December the low was 1.5343. The high reached 1.6744.  A move toward 1.6209 is possible for the pair…if the bearish technicals can remain.

The GBPUSD  moved below the 100 hour MA (blue line in the chart above) and the trendline off the lows on April 4th, April 7th  and April 9th at the 1.6332 level and this prompted a sharp move to the downside. The momentum continued toward the 200 hour MA (green line in the chart above) where profit taking buyers entered. 

The subsequent correction took the price back to the 100 hour MA (blue line) and has since moved once again to test the 200 hour MA now at the 1.6239 level. 

Clearly, the market has defined support and defined resistance. The direction of the next move is now in question. 

When the price is stuck between the 100 and 200 bar MA (like in the chart above), I call that dynamic trading between the Goal Posts. The Goal Posts are defined by the two moving averages.  By doing this, the market participants are saying is “the downside is preferred but the market is not really ready to trend”. 

Typically, on a break of either MA, should solicit additional momentum in the direction of the break.  So if the 200 hour MA is broken, look for the trend to the downside to continue. Conversely, if the 100 hour MA is broken, look for the bulls to take charge once again.  In between be patient.

The ECB is expected to raise rates by 25 basis points on Thursday. The central bank officials have telegraphed the move so there should not be a surprise on the announcement. What would be a surprise is if the central bank chooses to increase rates by 50 basis points instead of 25 basis points, or if ECB’s Trichet is overly hawkish in his comments at his customary press conference.  

The increase is in response to higher inflation. CPI for February came in at 2.4% last month. The Flash Estimate for March came in at 2.6% last week. With the ECB single mandate to control inflation, the rate is simply too high for officials being above its 2% target.

When a central bank starts to tighten, it usually is not a “one and done”. As a result, I would expect a gradual series of tightenings that will get the ECB’s point across.  Even with the tightenings the inflation rate could still trend higher if oil continues to rise due to supply issues or expectations for supply constraints as a result of mideast tension. Since the ECB is not concerned about core inflation but simply total inflation, the series of rate increases could slow economic growth too much at some point (and be hard on the weak sisters in the EU especially). However, the ECB will likely continue the pressure until inflation does come down. 

What may also contribute to slower growth is if the EURUSD continues its move to the upside. Of course a rising EURUSD has the effect of making exports less competitive abroad. So far, Germany has enjoyed a increase in exports as a result of stronger growth in emerging countries. The flight into the CHF has also benefited German exports vs Swiss manufacturers.  However, should the EURUSD and EURCHF continue to rise, this too could lead to a more substantial decline in growth… eventually.

What about now?  Does the EURUSD have room to rise further?

It certainly is a possibility especially if the US does not start it’s unwinding of economic expansion. Although some Fed officials have recently indicated a desire to take away some of the proverbial “punch bowls”, the market is anxiously awaiting what Chairman Bernanke feels about the unwind idea. Chairman Bernanke is scheduled to speak tonight at 7:15 PM ET, and although he is not expected to comment on economic policy, he may give his views on the recent employment report and his views on the pace of expansion.

Even with a more upbeat assessment, the dollar may still lag.  The Fed is likely to stop the non-interest rate components first before lowering rates.  The Fed has indicated they could stop the reinvestment of maturing proceeds from QE. That should progress to stopping QE altogther. From there they could increase the reserve requirement on banks before finally raising interest rates. That is a lot of potential steps to unwind before interest rates are changed.  Any delay by the Fed and the the EURUSD can easily continue its move to the upside. 

That is the fundamental story at least.

The technical story has key trendline resistance above at the 1.4280 level to get through. This level corresponds with a trendline off the July 2008 and Nov/Dec 2010 highs.  The level is also equal to the high price from November 2011. 

So far the price has been able to stay below the key level (high today reached 1.4267). However, a move above the level coupled with hawkish comments from Trichet on Thurday and/or dovish comments from Bernanke, could lead to the next leg higher in the EURUSD. Be aware.

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The EURUSD has stalled it’s decline today, despite a downgrade from Portugal to BBB- from BBB.  The credit agency did take the country off negative credit watch but said that Portugal will likely need considerable external financing and will likely get funding through the EFSF (European Financial Stability Facility) and thereafter the newly formed European Stability Mechanism (ESM). 

The EURUSD has moved lower from the high of 1.4148 reached in the London session and reached a low of 1.4046 in the NY session. Looking at the 5 minute chart, the price is squeezing higher and looks toward intraday resistance against the 1.4079 level with better resistance against the 1.4085 level where the 38.2% of the days trading range comes in.   If the price correction finds sellers against the 1.4085 level, the sellers will likely remain in control. If the price does not stall at the level, a move through the 200 bar MA in the same chart at 1.4091 would lead to further disappointment for the bears at least in today’s trading. 

This week the CPI for the month of February will be released in the UK on Tuesday. Then on Wednesday, the BOE will release the minutes of the Monetary Policy Committee meeting. 

The CPI is eyed as not only is the headline number expected to increase by a robust 0.6% on a month on month basis, but the year on year measure is expected to rise to the highest level since October 2008 (after oil prices had peaked at $160 per barrel). 

To increase the market anxiety, the core inflation is expected to rise to 3.1% YoY. This is equal to the highest level going back to 1997.

The BOE targets inflation at 2-3% for the headline number. Having the core level also above the upper band of the inflation target will be worrisome.

On Wednesday, the market will get a clue just how worrisome the price increases are to the Bank of Englands Monetary Policy Committee when the minutes of the last meeting are released.   At the meeting we already know that rates and QE were kept unchanged. We do not know the vote nor the details from the members.  At the last meeting, the minutes showed that,

“Most members agreed that the balance of risks to inflation in the medium term relative to the target had moved upwards in recent months and that the case for withdrawing some of the current exceptionally accommodative monetary policy had consequently been strengthened.”

With inflaton higher this month, how much closer is the central bank to tightening? 

The GBPUSD has been supported on the back of the expectation of higher rates versus the US.  The pair has moved above the trendline resistance at the 1.6300 level, and has upside resistance now between 1.6328-42. A move above that level should increase the buying interest as shorts are forced to cover and the buyers on interest rates rising, squeeze the shorts.

A move below the 1.6292 level (ceiling from earlier today) is likely where the late longs feel some heat before the data is released.  

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The fundamental news continues to be fluid. Will there be more devastation in Japan? What will the implications be for their economy? For the global economy?  What will the FOMC say today? Will it push off any change even further? How about the ECB? What does the global fundamentals mean for them?

When you have so much going into the fundamental pot, any one story can take hold at any given time and force the currency pair higher or lower (depending on the story and market interpretation).  This ambiguity from the fundamentals is why I will focus on the technical levels even more than typical. 

By following key technical levels it allows for the defining of risk. If you can define risk, you can avoid the “blow up” trades that can hurt retail traders during these times. 

For example, in the chart above, the blue line in the chart is the 100 bar MA on the 5 minute chart. Note how the market used that MA on the way down today and when the market turned it was from this level that the bulls gained confidence.  Traders did not need to know why the market was moving lower or moving higher. They only needed to know the price momentum had taken the price above or below the Moving Average (or used the level as a selling “borderline” when the price was moving lower. 

The green line is the 200 bar MA and it gave confirming clues for the move down and for the move up.  Retracement lines can also be used to confirm the direction of a move.  The move through the 38.2% retracement of the move down today gave traders added confidence to the upside.   Imagine buying on a move above that line at the 1.3911 level. If you did, your risk may be a move back below it and perhaps the 100 bar MA (blue line).  Risk is limited. The upside is a move through the 200 bar, the 50% and now the 61.8% level.

At the end of the day, know one really knows what the future may be nor the implications from the current fundamental environment. Following the price and technical tools will help define the risk, lessen the risk and may even allow you to take advantage of the volatile up and down trends that occur as a result of the fundamental ambiguity. 

Today is a day where being an analyst can be difficult. Writing about market movements when there is devastation, death and suffering at the other end, is not comforting.  My heartfelt condolences go to the victims and families of the natural disaster and hope for peace and a speedy recovery.

When event risk, like this takes hold of the market, it reminds me of the need to listen to what the market price is saying. There are so many things that are in flux.  What will happen to oil? What will happen to commodities? Will there be increased demand for commodities to rebuild?  Does this increase inflationary pressures? Does it slow growth in the region? in the world?  What will the ECB do? Will they wait and see instead of tighten? Will the Fed extend QE (i.e. QE3)?  In Japan do corporations repatriate funds back home? What do insurers do? What is the damage total? Will there be another earthquake? What about the potential for a nuclear accident? 

This is just the start of the fundamental story.  Those pieces can all take charge at some point or another and cause the price to move.

So what do you do? 

For me, the only way to work through all the uncertainty is to listen to the market.  How is that done?  Traders listen to the market by applying technical tools to the market prices. The technical tools define risk and should tell the trader to be short or long.

In the chart below, the USDJPY moved sharply higher initially. The move quickly found sellers as the idea that funds would need to be repatriated in order to rebuild and pay for the devastation.  That was at least the story. The technicals were really leading the way.

The price first moved through the 100 hour MA (blue line in the chart below). It then fell through the trendline support line (that held 3 separate time on the trendline).  Not far from there, it fell through the 200 hour MA (green line). Note that when the price corrected after the first plunge, the 200 hour MA (green line) held the correction. The market was talking and saying loud and clear, “the price had to go lower” and it did.  What was the risk to the trader?  If the price moved back above any one of these lines/moving averagas.

The fall continued until the price hit a trendline on the daily chart (see daily chart below). The price stopped at the line. The market was talking and it said, “the low is in place for now”.  Traders modestly covered, and the bias remains down, but the market had spoken.

The news and event is overwhelming on many levels.  I hope that those directly effected by the tragedy can have the peace and courage to recover. My thought and prayers are with you all.

For those fortunate to be able to trade, the lesson is to listen to what the market is saying.  It spoke loud and clear today. It showed the way. 

Peace. 

Today is a day where markets are correcting/changeing. The US stock market is down 170 dow points, Gold is down sharply (down $23), and Oil is also taking it on the chin. The Canadian dollar is influenced by the price of oil so with the fall in oil, the C$ is falling with it (USDCAD moves higher). In addition, the Canadian Trade surplus fell to  0.1 Billion C$ which was much less than the 2.6 billion surplus expected.  Perhaps this helped contribute to the rise in the USDCAD. A move that is correcting the trend to the downside.

Of course the “fundamental story” is what people like to hear. It tells the ”reasons” for the move. The technicals for the pair also contributed to the sharp rise back higher as well for the USDCAD.

Looking at the hourly chart (see chart above), the move higher today started by using the 0.9682 level as the springboard. That level was the low from Feb 28th and has been a nice floor over the last 24 hours. The floor gave traders the confidence to buy against a limited stop below. 

The move off the low gather momentum on the move above the 100 and 200 hour MA (blue and green line in the chart above).  Those technical levels did little to stop the momentum surge higher. The move above the 200 hour MA was the first breach, since February 24th.  This is significant and helped contribute to the move higher. 

Above there is upside resistance at the 0.9777 level where the 38.2% retracement of the move down from the February 23rd high to low is found.  It also is a few pips above the high reached on March 2nd (0.9774).  A move above that level is the next hurdle if the pair is to continue the corrective move to the upside.

On the downside, short term traders can lean against the 38.2% retracement of the move up from the low reached on March 9th. That level comes in at the  0.9728 level (see 5 minute chart below). The correction off the high today, came right down to that key “borderline” level and traders looking for a low risk buying opportunity, jumped on the opportunity for a rotation back higher.  Note that the 100 bar MA (blue line in the chart below), is also approaching that level as is the trendline.  These technical tools all help define the risk and limit the risk for traders looking for a bottom and a place to buy. 

So overall, the USDCAD is looking better for a change. Corrections are changes in the direction of the trend.  The signals from the technical and perhaps even the fundamentals are helping to support that change - helping to support the correction in the USDCAD.  

It’s up then it’s down….

That’s the market today (and some of the words to a song - I think) at least in the NY session.  We are seeing some dollar buying in the early NY afternoon, but can it be trusted?

As an example, the EURUSD has a nice ceiling in place against the 1.3939 level. The high corresponds with the low from Friday’s unemployment report. The 50% retracement of the move down from the March 7th high to the low today comes in not far from that level either (at 1.39447). So sellers feel comfortable against the level - especially with Greek/Portugal debt concerns starting to get the attention of the market.

On the downside, the market has found support against the underside of the trendline (at 1.3887) from March 7th high during the NY session and is back down testing that level currently.  Below that level is the 200 hour  MA (green line in the chart below). That level comes in at the 1.3877.  The moving average held support yesterday like a charm. Today, the level was tested then fell through in the London morning session.  The selling could not be sustained and the move higher started.  

So is the market hot or cold?  Will it go up or go down?  It might be the safe choice to buy low and sell high.  At least until the 200 hour MA at 1.3878 is broken or the 1.3944 level above is taken out