The price action in the foreign exchange market is disappointing. Early on in North America the euro approached the lower end of our initial target of $1.3000-30, but then has come off hard to record new session lows. The selling pressure, which peaked as Europe finishing up, ran into some bids ahead of $1.2980. A close below $1.3020 would further sour the near-term tone.
Sterling remains the star performer, following the better than expected Q1 GDP report, but it too has lost its upside momentum. Sterling's high today, near $1.5480, is the best it has seen in two months. It managed to overshoot the 38.2% retracement objective of its two and a half month 16 cent fall to start the year. A close below this retracment objective (~$1.5425) and especially below the previous high (from mid-April near $1.5412) would warn that the break out is premature and it remains a range trading affair.
Yesterday, we suggested two short-term trade ideas. One was to buy the Australian dollar. It moved within 10 pips of our initial target of $1.0350, but the momentum stalled and the Aussie returned to straddle the $1.03 level. Although disappointed with the price action, we are more inclined to bring the stop up to our entry level, which is near the low of the day.
The other trade was buying the euro against the Canadian dollar. The euro rose through yesterday's high against the Canadian dollar in early North American activity then reversed to trade below yesterday's low. A bearish outside down day is being traced out. The euro fell to approach the 50% retracement of its gains since April 4. A break of today's low would target the CAD1.3170 area. Our recommended stop, below CAD1.3320 worked well to limit the losses.
Many attributed the Canadian dollar's gains to the new about the U.K. Yet over the past 30 days, the correlation of the returns (% change) is about 0.38. Perhaps, more interestingly, the Canadian dollar's correlation with oil prices (WTI) has increased. Over the past 30 days, the correlation of returns is near 0.60, the highest six months.