Global currency markets finally caught up with equity trade, and managed to set a yearly high against the dollar in the week ending Jul 31st. The moves however, came with a warning sign in regard to their sustainability, from the fact that they achieved those highs on weak volume, and very choppy order flows.

The move to yearly highs followed two weeks of trade in which the equity market experienced very strong bullish trends, compared to the range-bound feel, and sporadic nature that forex pairs maintained up until the break higher. The extremes of forex trading were seen in the fact that record highs were made off only seven or eight 30 minute chart candles that housed 95% of the gains made in a two week period. If a trader missed the break, the wait was long for the next move.

The flow in equity trade that built day-to-day, and was free of volatility spikes to the greater degree, was followed in forex by break-out and consolidation trading, instead of smooth order flows. To tenured forex traders, that was a red flag that the trading pattern is being forced, or at worst, subject to automated order flows that have no subsequent follow-through.

On Friday Jul 31, when the currency highs were set against the dollar, the forex market saw exaggerated order flows again in reaction to the International Monetary Fund report on U.S. debt and growth valuations. The IMF release hit at a time that the European market was going into the close of their week, which created maximum momentum in a period that is always susceptible to allowing break-out moves to hold, even on light volume. Even with strong overall market momentum elsewhere the major pairs still managed only two 30 minute periods of break-out trade, before heavily consolidating.

The parabolic nature of the moves lead us to question their ability to hold when a full market was running, something that rang true as the next week of trade unfolded. At the beginning of trade in August we stated that going forward, the forex markets were very likely to move towards currency valuations that trade economic outlook, growth, and interest rate differentials, rather than trade just following risk tolerance or risk aversion in global equity market momentum each day; reversing something that had been in place for two years.

The choppiness of forex moves from May 21 09 when the 4 hour chart channels were formed, combined with the extended price points that forex had reached, all added up to a red flag in regard to forex values. That was something not helped by the large amount of speculative interest in the crude oil markets that had also empowered Usd selling. In the week that was to follow, that housed three interest rate decisions and the U.S. Non-farm Payroll report, we were looking to regional stories and valuations to back the new found currency values, or not, as the case may be.

What we saw in the period of trade that finished on Friday of last week confirmed the theory that forex valuations had got ahead of themselves, and had overshot the target in regard to Usd selling. Currently, most market participants agree that the dollar's outlook lies on the downside, the reasons may vary, but usually spin around the same themes: the huge U.S. dollar deficit, the big spread between the Federal Reserve's overnight rate and the rest of the world, or because of the high level of inflation that is likely to emerge in the coming quarters.

One way or the other, the dollar is again heading lower, they say. So if the dollar is heading lower, what happens with the major pairs?

If the dollar is heading lower, then the euro must be heading higher, due to the fact that the two most influential currencies make up Eur/Usd, and also form 60% of the dollar index valuation. Over the last few years, the single currency has been propelled by better than expected macroeconomic data, with the last year of reporting having changed the picture completely in regard to forward growth and interest rate outlooks.

One of the strongest drivers for the euro has always been the ECB's determination to fight inflation, but for now, the Euro-zone CPI read has shown that inflation in the consumer price arena has fallen to negative 0.6%, far from the ECB's nominal target of a positive 2%. That suggests the euro's main valuation drivers are past history, and things will need now to draw on current headlines and reports to derive fair value going forward.

Another strong theme that is flowing through the market valuation of the euro and dollar is that commodities are going to move higher, and possibly much higher than the already speculative present levels. This would automatically empower two currencies, the Australian and Canadian dollars, which are directly linked to commodity market values, due to their richness of natural reserves of gold, oil, and minerals.

However, how far can the commodity market go, with oil now trading at $75 per barrel, and very little in the way of justifiable global growth outlooks that report increasing demand? This is over and above the headlines that show increasing inventory levels of oil, and have the high seas acting as an oil tanker car-park. Deliveries of crude are being parked at seas while traders balance books, current demand, and forward contract pricing, that like forex, may have overshot, and got too far ahead of themselves.

When compared to one year ago, when oil surged towards the $150 benchmark, the present crude value looks rather cheap, relatively speaking. However, compared with how oil traded over the last decade, $75 per barrel looks to be laden with speculative interest that can sometimes create bubbles, especially when we consider that oil averaged $30 a barrel in 2003, and around $70 in the 2005-2006 period, when the global economy was in full expansion mode.

Something needs to give; either global growth very quickly catches the futures contract price on crude, or traders and speculators move fair value lower on oil, and that move would automatically increase the value of the dollar.

All this put together shows that the major pairs will now have a hard time finding fair value that reflects the macroeconomic picture. The same drivers that until now have pushed global equity, commodity, and currency valuations higher, are starting to fade, leaving the currency market to find a new fundamental guide that does more than follow S&P futures trade around.

The forex market that traders and investors created over the last two months, which has been mostly range bound with sporadic bursts that come out of nowhere, have pushed valuations to yearly highs that now may have to reverse to the opposite side of the trading channel range. If that reversal move is made, it will be on the strength of weakening equities, weaker crude, and weaker Eur/Usd valuations. If not, and the market sentiment ignores a lack of global growth to justify currency valuations, and pushes forex values higher against the Usd, following inflated stock and commodity valuations, the traded forex market will shift from one breaking headline to another, as over-extended trade looks for reasons not to reverse.

In the week of trade since hitting the yearly high, the major pairs pushed back lower, in direct response to macroeconomic headlines that are struggling to justify current forex valuations, it would seem. That now leaves most currencies close to the top of huge, sideways, 4 hour chart channels, which have also pushed the Usd to a massive support area that will be extremely hard to get through, unless volume levels quickly increase.

The dollar has been sold over the last three months in response to higher equities and commodities, now however, the headlines need to start to take up the speculative slack, and draw in institutional sized volume flows that justify current values.

The way to trade the current set-up could be with a Usd straddle that each day pits the strongest and weakest pair against the dollar, one long and one short, looking to take advantage of momentum that comes from that day's breaking headlines.

The Usd/Jpy pair is likely to go sideways, within the 4 hour chart range, but not to be able to easily break new ground, either long or short, As such, the best bang for the buck may come from trading the yen cross pairs, looking for major currency breaks that offer a more stable ride if Usd/Jpy is moving sideways.

The Jpy cross pairs have their own nuances to work to, and their own specifics of times to place around the regional market opens. Blanket yen trading will not be as reliable as choosing the cross pair that is backed by strong momentum against the Usd. Jpy cross-pair trading has unique traits that follow the moves in the cross pair's moves against the Usd. The yen cross pairs move only as a consequence of the moves in the Usd based major. For example, Eur/Jpy value = Eur/Usd x Usd/Jpy. Therefore, always understand what is driving the dollar, before looking to trade yen cross pairs.

Overextended, sporadic order flows, questionable sentiment, low participation; this is summer trading at its finest, however, it does look as though it may be ready to break. We have it covered with the dollar straddle, looking for macroeconomic instigators to fire off each day, and are looking to move away from trailing the S&P moves in the forex arena. Now is the time for currencies to stand up and be counted, on their own economic merits, and that will be very interesting to observe and trade.

Major Pairs And Their Momentum Drivers

Reviewing The Major Pairs, and Their 4 Hour Global Market Drivers

4 Hour Chart Forex Trend and Momentum Updates:

We still have long-dollar trends, and also have overbought Usd based reads on the major pairs. That leads to one of two things happening. Either, we are seeing a swing change that starts to set up a period of Usd buying ahead of the FOMC rate decision and statement on Wednesday. Or, the major pairs have pulled back to support in anticipation of making the next leg higher against the Usd. Either way, a straddle will catch the variables that fall in between.

The answer is to look to regional economics to light the technical fire, and to be prepared to cast opinion to the side, and trade the order flows that hit in three, eight hour waves as each economic region opens for commercial business.

4 Hour Chart Usd Trend and Momentum Updates:

Red flag; Global equity markets are overbought, while commodity markets are oversold, and that will lead to a clash of the Titans in regard to where global markets trade the dollar. Oil has been extremely volatile in its intra-day, and day-to-day ability to move values, something that equity trade has eliminated in the recent run. That signals an oil market that is loaded with speculative interest, at a price point that may just be a little above perceived fair value.

For equities to hold higher as earnings season trade comes to a halt, there will need to be strong support coming into crude oil trade. Right now, these two markets need each other to be able to hold valuations. Either one starting to show signs of fatigue will easily draw in moves that bank recent profit. Equities and oil are on the opposite side of Usd moves; Equity and Oil down = Usd up, and vice versa.

Long trends seem to be having their first real test for three or four weeks, and the resulting moves may set the tone for August trade. In bull markets, August is the third best returning month of the equity year, however when August dips, it does so in a big way. Let the games begin.