On Friday, most currencies closed higher for the day versus the Dollar, with some posting rather impressive gains. The British Pound reached as high as 1.5580, while the commodity currencies had proportionate advances. In addition, they close near daily extremes, which often means some continuation after the open. Even the Euro had a net positive day, with a high at 1.2255. That is in spite the fact that anti-EUR bets are on the rise, according to the Commitment of Traders Report. The data released by the Commodity Futures Trading Commission showed that net Euro short position increased by 10% from previous week. While the data comes from futures exchanges, it serves as a good proxy for the spot market, as it indicates a broader sentiment. In such case, Friday's rally in the common currency could be nothing more than a technical rebound or a short squeeze as some suggest, and will not have a staying power. We should find out soon.
In a separate issue, also damaging to the US Dollar was the unexpected drop in consumer confidence. The Reuters/Michigan Consumer Sentiment Index (preliminary) came in at 72.0, well below the forecast of 73.4. This flash reading suggests weak final result in two weeks, which indicates that the recovery in US economy is not as strong as previously thought. Market players might forget about it this coming week, depending on what news emerge from Europe. The risk phase can easuly be switched off, as we have seen so often lately.
Last week I was looking to sell commodity (risk) currencies, using the NZD-JPY as an example – most other pairs were very similar. The plan was to sell it at 63.27, using 1H chart, targeting 75 pips. Even though the trade was not pretty, it worked, reaching my full objective before the rebound on Friday. Incidentally, this late rally still fits in a possible larger-scale bearish reversal building on the intermediate term chart.
On the 4H chart, the NZD-JPY almost touched the previous low of 62.23, but not quite. This is somewhat of a concern, as I prefer to see the earlier low undercut by at least few pips, which would indicate strength in the pullback. Still, this chart reveals potential Head and Shoulders, with the right shoulder yet to be formed. For me the neckline is more important due to a better-defined entry. Eventual move under 62.23 could present a good shorting opportunity, with a large target at the 62 handle. Given the time scale involved, this can easily take 2-3 weeks (if it happens).
After the open, I will look for short-term reversals in the pairs that had good gains on Friday and closed near their respective daily extremes. One of them is the GBP-USD, which had a very good day and is likely to correct on Monday. I want to see a bearish reversal candlestick pattern in the hourly chart, with objective of 30-40 pips. Details will have to be worked out once the actual signal develops. Have a great trading week!
Mike K.