History Tells All - Forex Will Dominate

|
Includes: ERO, EU, FXA, FXB, FXC, FXY, GBB, SPY, UDN, UUP
by: The LFB

Global markets have moved sideways in recent trade in very tight channels that have very controlled price action and little sustainable movement. The ripples from the Non-farm Payroll boulder have worked their way across the Asian and European markets, and ended up back in a U.S. session that once again looks to have very little reason to move.

The dollar index (DXZO) is sitting just underneath the 100-day Simple Moving Average at 80.00, which equates to a valuation in Eur/Usd of around 1.3250, and as tenured traders will know it is a price point that has created major price action previously on both asset classes.

There has been a slight disconnect between the inverted S&P 500/Usd correlation in recent trade as the 12-month 95% link between stocks and the dollar weakens in-line with reaction to Eurozone economics and U.S. debt and employment challenges that are being absorbed in small doses during daily global trade.

Equity futures are holding close to yearly highs, as are most commodity sectors, but not in a reflection of global growth and expansion demand, but more it would seem on near-term strategies that have speculative interest hedging moves in the dollar as QE2 economics unwind.

Low-participation equity rallies have managed to hold, in the face of massive insider seller to buying numbers that reveal owners of their own company shares are cashing out in far greater numbers than they are buying back in. The record number of mutual fund redemptions from retail investors means that the stock rally since the May flash-crash has been missed by most, and enjoyed by few.

A break above 1250 on S&P 500 futures trade will draw in a December year-end rally that is likely to hold if instigated on a high-volume day, but breaking through a wall of resistance at 1230 will not be easy for equity markets to achieve. If equities can hold higher the dollar index will be looking at a test of 78.50 just as Eur/Usd then tests 1.3500.

The Tuesday vote by the Irish government on the IMF/EU bail-out package will now take center stage for both European equity momentum and Eur/Usd valuations. Volatility will be rife in the lead-up to the vote.

Crude oil trade is holding 88.00 support, in a move higher that has not impacted Usd/Cad to its normal degree, with the test of parity at $1 to C$1 unable to hold. The flow of Canadian economic data has shown a slight slowing in the growth rate that previously lead to moves that tested 0.9900 on Usd/Cad. Fair value looks to be in place just under the 50-day SMA area at 1.0150 on the pair ahead of the Tuesday interest rate statement from the Bank of Canada.

The Bank of England will draw attention to the valuation of Gbp/Usd with their interest rate decision and Asset Purchase Facility update on Thursday, in a week that is fairly busy with U.K. economics. The fall-out of whatever happens with the Irish debt bail-out will impact Gbp valuations because of the exposure U.K. banks have to the region. Things will get volatile in Gbp/Usd trade as the pivotal 1.5750 area once again comes into play, with the 100-day SMA area acting as a very important price point that will not be easily cleared, one way or the other.

The trade desk will be looking for price action in the Asian session this week, something that can be sporadic in nature on a regular week of trade, but there does look to be enough potential in the global traded market and economic calendar to instigate moves that could hold, and at very best could break the recent channels and test new price points. These really are unique times, both economically and technically that will no doubt be looked back upon as pivotal in the direction of global trade as the next decade gets underway.

The previous trading years that were similar to these, with complete outlook and expectancy being changed in quick time, were the 1987 equity crash which lead to tighter exchange floor controls, the 1988 savings and loan crisis in the U.S. that created huge financial change, the 1997 Asian financial crisis and anniversary crash which lead to an increase in electronic trading, the 2000 internet bubble bursting that had electronic trading fears at its epicenter, all leading into the sub-prime and credit crisis that ran through 2008 and into 2009/10.

Looking back, the cycles seem to be getting closer to one other and creating deeper knee-jerk reactions as they unwind, which is tightening the inverse Usd/Risk-Market correlations that sit at 95% over the last 12 months. The dollar connection may have a lot to do with the reason that buy-and-hold investing over the last ten years would not have created too much return when compared to the near-term mantra of 4-hour chart momentum reads signaling mid-term swings that need to be traded rather than invested in.

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