Wednesday, November 01, 2006

Wednesday, November 1, 2006

The Now:

After a little spike following the weak ISM report, the dollar has pretty much stayed put today. The ISM came in lower than expected at 51.2 compared to the forecast of 53. On our Swissy trade, the pair came within 3 pips of stopping us out but has now settled back to where we were yesterday.

I believe the reason why the dollar didn’t drop further is because of the anticipation of this Friday’s Non Farm Payroll (NFP) report. This is usually a big mover and comes out the first Friday of every month so the lack of movement today indicates that this is probably what traders are waiting for.

US data has been coming in very weak now. The combination of the real estate downfall, weak GDP, weaker business and manufacturing activity, lower consumer confidence, and now the stabilization of oil prices, we are seeing a pretty good set of ingredients that could make for a longer term dollar sell off.

It’s pretty apparent now that the Fed will hold rates steady for the rest of this year, and the possibility of them cutting rates in Q1 of next year is increasing. I still don’t really know if the Fed will cut rates in Q1 but I do know for sure that they will not be increasing them anytime soon. That seems to be the sentiment among traders now and I think it’s what will be keeping the dollar from making any strong gains.

I’d like to note that on the Cable, the pair is hovering around a 3 month high at 9100. The pair has tested this level 3 times in these past few months and each time it has failed to break through it. With speculation that the BOE will raise rates to stop inflation and the mixture of weak US reports, this might be the time that the Cable finally pushes past 9100. I will be keeping a close eye on this pair to see what happens.

Coming Up:

ECB Interest Rate Statement
7:45 am ET; 12:45 GMT
Previous= 3.25%; Forecast= 3.25%
Interest rates are expected to stay the same, but regardless, you should keep an eye on this.

Trichet Speaks
8:30 am ET; 13:30 GMT
The most important thing to watch for during this statement is for any indication that the ECB will raise rates. If Trichet doesn’t say anything about raising rates, this should weaken the Euro at least for the day. However if he is hawkish then watch for dollar to continue drop against it.

Chart Analysis:


The Euro didn’t quite reach 2800 which is where I said would be a good place to short, and it’s a shame because the price has retraced back down to around 2750 since getting as high as 2797. The bearish hidden divergence I’ve been talking about is still in place so a move to the downside is still a good possibility. 2700 looks to be the next near term support.


This Cable spiked briefly above 9100 and got as high as 9134 before moving back below 9100. This level is a good “make or break” level for the pair and I’ll be watching it closely to get an indication of future direction. On the 4 hr chart we are seeing another sign of a reversal as we can see a regular bearish divergence. Notice how the Cable has been making higher highs while stochastics has been making lower highs. That and the fact that the Cable has just been skyrocketing lately leads me to believe that we will see a short term reversal in the near future. I think we’ll see a short term move to 9000.

Trade Idea:

Short at Market Price (around 9077); Stop Loss: 9135; Target= 9000


After coming within 3 pips of getting stopped out, the Swissy has bounced back up and is now hovering around our entry. The bullish hidden divergence is still in tact and there is also a bullish regular divergence on the 4 hour chart. This is giving me strong indication that a short term dollar rally to at least 2500 is a strong possibility. I still like this trade and will continue to hold.


We are now seeing a bullish hidden divergence on the Yen as well as another test of support of the 100 SMA on the daily chart. Look for this pair to bounce up to at least 117.50 and maybe 117.80.


With traders anticipating Friday’s NFP report, I think the markets will follow the technicals tomorrow and we’ll see a short term dollar rally. The 4 majors look poised for a reversal and unless something drastic happens tomorrow I think we’ll see that reversal tomorrow.



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