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Weekly Forex Forecast For July 30th, 2012

|Includes: CurrencyShares Australian Dollar Trust ETF (FXA), FXC, FXE, SPY

No news was great news for AUDUSD this past week as the favorite currency of institutional investors posted a 4-month high on Friday, July 27th, 2012. The Aussie recovered quickly from last Monday-Tuesday's sell off motivated by both ECB Central Banker Draghi's "whatever it takes" declaration on Thursday regarding safeguarding Europe and its currency, and a global stock market rally which left the S&P 500, to which the Aussie has an 80% plus correlation, at a new 2-1/2 month high settlement. This week's trade reminded me of the importance of always focusing on price, and leaving opinions and emotions out of market analysis. Despite the week's bad news - falling German manufacturing numbers, a terrible U.S. Core Durable goods figure, markets are forward pricing mechanisms, and 1.0200 held as support for the Aussie, which had actually rallied handily back into the 1.0300 handle even before Draghi's chest puffing. The past week's trading activity reminds me of why it is essential that we use counter-trend rules when shorting markets with low non-systemic risk such as the Aussie. Counter-trend rules mean we use tight stops, exit a portion of the position at a small profit, and trail said stop. We can never be reminded enough that we need to trade markets, not what we read and feel. From a technical perspective AUDUSD is in a position to shift its secondary pattern - think 1-month to as many as 8-months -- to bullish, in-line with its already bullish Primary Pattern. See Figure 1. The one constant when it comes to the Aussie, we like buying dips. We would however need to see a 2nd daily close above 1.0425 or so to shift that secondary pattern bullish. We also may need to adapt a "dog day" theme which is similar to our counter-trend rules, i.e. beware of "the chop".

Figure 1. AUSUSD Daily Chart

In a valiant effort, spurred on by ECB Chairman's Draghi's public declarations, and private dealings with German's Bundesbank, the Euro retraced just over 50% of the July plunge to post a 2-week high settlement. The Euro did close well off the highs last Friday, but keep in mind, from Germany's position there is nothing wrong with a soft currency, because that's a plus for German exports. A less panicked currency and an easing of global fears which would bring firmer stock prices would be most beneficial. You won't hear European internationals complaining about a lower, think beneficial currency differential, with their trading partners, and that is why we like continuing to sell rallies. We have said since the beginning of his tenure that the markets respect Mario Draghi and the European Central Bank, and this week brought that point home once again. For now this past week's posturing by Draghi is bullish and the Day to Day Pattern in the Euro is starting to reflect this. While we see a band of resistance just ahead, we want to see what headlines the ECB/Bundesbank meetings yield, before eying sell set-ups too closely --1.2475 to 1.2500 is definitely a band we will be watching for resistance. Our current downside target remains 1.1900.

Figure 2. Daily EURUSD chart

The Loonie is in our buy zone just above 1.0000 basis USDCAD but showing little signs of support so far. Given the weakness in the U.S. Dollar and strength in all the asset class markets across the board last Friday we would not expect this pair to buck that trend. As long as it holds above 1.0000 we will watch for buy set-ups with the primary pattern arguably higher given the current 1-year pattern of higher lows. There was very little Canadian specific news all week to disrupt the anti-Greenback correlation this currency generally follows. Tuesday July 31st Canadian month over month GDP will be released with the expectation at just 0.2% growth. Given U.S. GDP figures are estimated to come in over a full percentage point higher at 1.5%, a base around 1.0000 and a subsequent rally from these levels does not seem unreasonable. A breach of 1.000 on a 2 candle closing basis on the downside however, would be supported by the current bearish day to day pattern and would likely mean a test of the primary trend line below which intersects just above .9900.

Figure 3. Daily USDCAD Chart

Jay Norris is the author of Mastering the Currency Market, McGraw-Hill, 2009 and Director of Learning at Trading University in Chicago

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