By not cutting rates an additional 25 bp on Tuesday as the financial markets were asking, the Fed sent a signal to the world that it is concerned about inflation. This subtle move spooked fund traders holding long assets and caused them to take profits. The huge selloff in markets that had gone up at the mercy of the Dollar seems to be a delayed reaction to the Fed's action.
This single move by the Fed appears to have killed the major trend in the commodity markets. The worst may be yet to come as hedge funds have built up huge positions in gold, wheat and crude over the course of a year. Watch for wicked two-side trading in the commodities that may lead to extraordinary volatility swings in the Euro.
EURUSD: U.S. investors who sold Dollars to buy gold and crude oil are unwinding long positions in these commodities and buying back Dollars. This put downside pressure on the EURUSD all day. Additional selling pressure came from chatter that some banks in the Eurozone are having funding problems.
With the two-day break, a new main top was formed at 1.5904. The current main range is 1.4437 to 1.5904. This creates a support zone at 1.5171 to 1.4997. The market had been holding above a major up trending angle at 1.5677 today. The close under this angle indicates weakness with the next angle at 1.5037 the downside target. Look for a major buying opportunity on a pull back to 1.5171 to 1.4997. Down trending resistance is at 1.5844. Counter-trend traders could look for a sell there with a new high out.
GBPUSD: The main fundamental affecting the GBP at this time is the bank credit issue. The market seems to be waiting for bad news about UK banks. Traders are anticipating the U.S. economic woes to spread overseas. Additional weakness is coming from the revelation that the BoE considered cutting rates by 25 bp at its last meeting. This rate cut rumor grew new legs on Wednesday as traders bought Dollars against the Pound to take protection against a future cut.
In addition to the main trend turning down on the swing chart, the GBPUSD broke through up trending support-indicating weakness. The next major up trending angle is at 1.9780. Look for a buy on the first test. The main range is 1.936 to 2.0398 making 1.9879 to 1.9757 a major retracement zone. Look for a buy in this zone also for a technical bounce. The market may retrace the current break from the top. A selling opportunity comes in at 2.0238 and 2.028.
USDJPY: The USDJPY rallied early in the day as the U.S. equity markets appeared to be in a position to follow through to the upside. Bullish news from Fannie Mae also supported the stock market while producing weakness in the Yen. The end of the day break in the stock markets led to a close near the midpoint. The key to sustaining this developing support base is the stock market. Cash came out of commodities in a major way and now has to find a home. Any strength in the stock market will likely lead to traders borrowing in Japan and buying Dollars.
The two day rally makes 95.73 the new main bottom but does not change the trend. The main range is 108.16 to 95.73 making 101.95 to 103.41 a key retracement zone. Look to sell a rally into this zone. Down trending resistance comes in at 102.36 inside of this zone. Sell the USDJPY on the first test of this angle. Based on the short-term range of 95.73 to 100.44 look for a counter-trend buy on a pull back to 98.09 to 97.53.
USDCHF: The USDCHF rallied as traders sold gold related currencies on Wednesday. Additional support came from the notion that the Fed is going to be less aggressive in the future regarding interest rates cuts.
A new main bottom was formed at .9647 after the two-day rally. The main range is now 1.0127 to .9647 with major retracement zone resistance at .9887 to .9944. With the main trend down look to sell a rally into this zone. Gann angles indicate if this zone fails to stop a rally, there is room to run to 1.0587. Based on the short-term rally, aggressive counter-trend traders can look for a buy at .9707.
USDCAD: The USDCAD posted its biggest rally in weeks as commodity liquidation brought heavy selling to the Canadian Dollar. The reasons for the strong Dollar were the renewed perception of a U.S. economic recovery and sharply lower commodity prices. For months Gold, Crude and Wheat have been holding the Canadian Dollar higher. With the massive liquidation in these commodities on Wednesday, the basis for support was eliminated. Additional pressure for weakness in the Canadian Dollar is talk of another round of interest rate cuts by the Bank of Canada.
After building a bullish three higher bottom pattern and consolidating for weeks, the USDCAD broke out to the upside. The market was able to overtake a major retracement zone at 1.00 to 1.01. Look for 1.00 to become support. The strong close puts the market in a position to challenge the next main top at 1.02. Because of the tendency to trade in a range, the safest trade is to buy dips close to par.
AUDUSD: The Aussie initially rallied on the Fed rate cut, but turned down during the U.S. trading session on the massive selloff in hard assets. Higher gold prices have helped support a stronger AUD against the U.S. Dollar, but the global liquidation in commodities brought heavy selling to the market.
It looks as if a long-term double top is forming in the AUDUSD. The market is breaking a major up trending Gann angle from .7673 the August 16, 2007 bottom. This price comes in at .9213 today. A failure to hold this angle indicates a sharp drop is likely. The first downside objective is .9005 followed by .8888. Additional Gann angle support is at .8931. Based on the short-term range, look to sell a rally back to .9373. If we do not get the retracement, then cautiously sell weakness with tight stops.
NZDUSD: The volatility in the NZDUSD is high as traders try to assess the long-term prospects in the pair. If the liquidation in hard assets continues tomorrow especially in the gold market, look for this currency pair to drop sharply as it tries to catch up with the rest of the world.
There was no confirmation of the double top on Wednesday, but the weak close puts the market in a position to challenge the last main bottom at .7872. A break below this price will turn the main trend down and confirm the double top. The market appears to be distributing out this top indicating that once it breaks support, the down move is likely to be very dramatic. Based on the main range of .7382 to .8215 look for an eventual break down to .7799 to .7700.
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