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Weekly Forex Forecast For October 8th, 2012

While it is quite a surprise that the unemployment rate in the U.S. could possibly drop from 8.2% to 7.8% even as job growth slowed, politics aside, jobs are still a side show to the predominant influence in these markets: central bank policies. The U.S. stock market and the EURUSD are once again higher on the month because of ECB boss Draghi's overall game plan, and Fed Chair Bernanke's widely anticipated QE III. Day to day economic news, even if it is a sharply lower durable goods number, or a flat non-farm payroll figure, just doesn't hold sway like it used to. Stocks and the Euro also benefited from short covering on behalf of smarter than the devil Wall Street hedge fund traders who were caught underfunded in U.S. stocks, and downright short the Euro heading out of the last quarter. The one thing that does remain constant however is that the market will always tell us what is important, or in the words of the prominent energy analyst Cynthia Kase: "the chart tells us everything the market knows about itself". I'm a big fan of Ms. Kase.

While U.S. stocks and the Euro have been immune to all the bad news on the economic door step lately, AUDUSD has not. Following the increase in bearish momentum from the RBA rate cut and the jump in the Aussie trade deficit last week, AUD pairs have been getting routed, taking away one of the few bright spots for yield seeking institutions and sovereigns. We adjusted our near-term downside target to just below 1.00 last week. Once below .9950 or so it really isn't that far to the 2012 low just below .9600. The Aussie no doubt will continue to be a great trading vehicle because it is an asset class market, and should always be remembered as a possible "buy when there is blood in the streets" in the event of a proper market panic.

Figure 1. AUSUSD Daily Chart

Along with being a poster child for the influence of central banker policies, the Euro is proof that we can see large, sustained price movement for no other reason than the majority of influential traders got it dead wrong the quarter before. The Euro also serves as a reminder of the relative nature of currencies and investment markets. If there is obvious downside risk in one currency, this becomes upside opportunity in other currencies. In other words what's bad for the Aussie is good for the Euro and Pound. And while I still can't quite figure it out, I do know that the whole design of the U.S. Dollar Index is brilliant. Because the Euro comprises 60% of the Dollar Index they both can't go down at the same time! Now that was good thinking.
Near-term we think the Euro eclipses the September highs at 1.3170 and tops out somewhere closer to 1.33. However, once hedge funds finally do pull the plug on Euro shorts, or more likely when the margin man pulls the plug for them, this market will be hard pressed to find buyers this side of 2013. While it will be easy for economic numbers going forward to look good in comparison to recent numbers, that likely won't be enough to sustain the current upside momentum. Until we see a break in that momentum however, the Euro is a short-term bull.

Figure 2. EURUSD Daily Chart

To see a video re-cap of Jay Norris' Live Market Analysis Session from Friday, 10-5 go to Trading-U Tube

Jay Norris is the author of the best selling book Mastering the Currency Market, McGraw-Hill, 2009.

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.