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Trend: Trend reads off the 4 hour charts are really starting to define a sing point being built on the major pairs, and are reflecting price action that is back into the middle of the channels formed in May. This is not a regional weakness story, and not a U.S. economic strength play; this is all a reflection of global tolerance for risk. Since March, the equity markets have added an average 50% to their values, helped in no small measure by earnings reports that hit reduced outlook numbers on the strength of restructuring of the work-force, and re-negotiation of credit terms.
The imbalance of hitting their expected earnings mark overshadowed the fact that the performances actually revealed a weakness in the economic outlook that that no book balancing could address; the employment numbers were dwindling, and only looking better some months because of potential employees taking themselves out of the job hunting domain. That all seemed to come to the fore last week when the most benign of releases, the University of Michigan Consumer Confidence report hit the wires.
Forward Growth: It seems logical that in a global economic slow-down that companies hitting earnings numbers cut labor, cut output cost, and streamlined production and service costs. The numbers were hit as a consequence of job cuts, and the impact of those cuts is being seen in the confidence numbers. The administration reporting of the health of the economy really is hard to de-cipher, due in part to the reports not being standardized, and to adjustments made to some and not others that make a direct regional comparison harder to make that it was just 15 years ago. For that reason it would seem, forex values are less likely to be set on forward growth and interest rate numbers, and far more likely to feed off the risk tolerance/aversion shown each day in equity markets.
The average trading range, as a reflection of the level of speculative interest in an asset, as well as the volume, a read on the institutional participation in moving price, have both been low during the period of equity market expansion, and that has raised concerns about the sustainability of the recent equity rally, that has pushed the dollar index to main support areas.
Stair-Step/Elevator: Without an increase right now in long price action that draws in increasing market-wide volume, the test of support at 975 on the S&P may soon be seen, and realistically, 925 does not look to be that far away from a test either. What took three trading weeks to build may be reversed in a stair-step up, elevator down move that tests 975, 950, and possibly 925, if volume does not come in to support the recent moves. The global equity markets are 20% away from the yearly highs set in August 2008, and that may be the hardest percentage gain that stock traders have to make, this year.
Hedge: The most cost-effective hedge against a falling equity portfolio would be a long dollar index play, and possibly a short EUR/USD trade that takes advant5age of the 90% correlation that exists between the Eur and S&P futures market.
For those traders looking at falling commodity portfolios, a long USD/CAD or long AUD/USD hedge would be the most well leveraged and probably cost effective way of balancing out the bumpy ride that oil markets have taken recently. Traders in the interest rate arena will be looking at USD/CHF trades to play the gains and losses in that market with some kind on insurance in place.
The way that global markets picked up the momentum from Friday's Wall Street close, and continued selling both equities and commodities, leads to massively overbought Usd positions on the 4 hour charts that tend to be the lynch-pin timeframe for forex valuations, at the same time the trends on the major currency pairs and the global dollar drivers are turning mixed, from a period of long trade.
King Of Currency: In all, it looks very much like a swing point is forming, and once again we have the four week dollar moves getting ready to play out another set of trade that confirms the greenback has no peers in regard to global currency dominance; there is not a challenger for the title of Global Currency, and whatever the woes, trials and tribulations at home, that is the reason that spot currency trading may just be the ultimate vehicle to hedge the commercial and speculative global markets.
In the current environment of low liquidity, and a lack of available credit, investors need to look for more than fair value; serious investors need to find good value in the cost of insuring their portfolios, and traded spot forex has no peers in regard to the amount required in margin, and the liquidity provided by the world’s largest traded market. The picture will be a lot clearer after the U.S. session of trade.
TIC Data: The Treasury Income Capital numbers at 09:00 EDT may help in setting the direction of trade, with the market expecting to see a net $17.7B flowing into the U.S. in the form of the purchase of long-term securities by overseas investors, compared to the flow of U.S. investor money going overseas. This is the spare cash coming into the U.S. that helps to fund the twin deficits; the Current Account, and Trade Balance.
A much lower read than the expected may add to the equity woes, and perversely increase the value of the dollar as risk aversion plays out in the form of a move to Treasuries and bonds, and we already know the hedge against that; Short EUR/USD, or long USD/CHF.