We are seeing some signs of vulnerability in EUR after a streak of six rallies in seven sessions. We touched a fresh weekly high in the North American session on Wednesday but we later closed lower and EUR is down through early Asia-Pacific trading.

Technically, the RSI and Stochastics are flashing highly overbought signals. We are also well above the mid-Bolliger Band. We think any move close to 1.2453 is a wonderful opportunity to establish shorts.

Perhaps the top story in the day ahead will be the results of Spain’s efforts to raise as much as €3.5 billion through the sale of 10 and 30-year bonds. On May 20, Spain paid 4.045% in a 10-year auction but the notes are currently trading near 4.939%. The market will want a yield close to 5.00%; if it’s above 5.25%, the euro will weaken. A failed auction (where it’s cancelled due to lack of interest) would knock the euro down about 200 pips, possibly more. Another metric to watch is the bid-to-cover ratio, which shows how many times the number of bids per dollar sold. A ratio below 1.5 would be worrisome while something over 2.0 would be a positive for the euro. For the 30-year bond auction, a yield over 6.10% would be euro-negative while under 5.70% would be positive.

Spain has about €16.2 billion in debt that needs to be paid in July and Madrid will need to raise funds in order to make the payments. If, however, Spain can find access to funds at reasonable borrowing rates, it won’t have any major debt obligations to repay until April 2011. Success at today’s auctions would clear the way for 10 months and give the euro room to breathe and retrace recent losses.

The pound sterling made another move higher on Tuesday as it reached as high as 1.4838 before settling a bit lower. It touched the highest since mid-May and continues a retracement phase in cable. There is now no major resistance on the hourly chart until the double-top at 1.5048.

From a fundamental perspective, we have claimant count data and retail sales data on Wednesday and Thursday but the market is entirely focused on the June 22 budget. In order to get the pound moving higher Chancellor of the Exchequer George Osborne will need to strike a balance between a credible plan to lower the deficit and something that doesn’t stifle the economy. It’s a tall task.

Technically, the daily chart clearly shows that we’re in a retracement phase but we have to point out that the RSI is beginning to look very overbought. We think the market will press into the 50.0%-61.8 % Fibonacci “box” but we are worried about the timing. If the market moves higher over the next few days it will leave the market in a severely overbought position ahead of the budget and that could lead to a big move lower if Osborne disappoints. If the news is relatively positive, there is still a great deal of resistance clustered around 1.50 and that should stall the market.

We are looking for any push above 1.49 in the days leading up to June 22 as an opportunity to establish short positions. Short-term traders, however, should look to enter into longs but cover them before the 22nd, when we’re expecting a big move.

We have seen some life out of the euro this week so let’s take some time to evaluate the long-term prospects of the European single currency.

We all know that the euro-dollar has been in a long-term downtrend. Since trading at a high of 1.5138 in December the euro plunged to a four-year low of 1.1877 just this past week. That’s a more than 3200 pip decline over six months – truly an amazing decline.

Almost all the money made trading the euro over that time has been on the short side. Rebounds have been shallow and short-lived. Many analysts have been preoccupied by calling the bottom and once again that’s where we are today.

Let’s have a look at the chart. We can see the long-term downtrend but just in the past week we have rallied about 200 pips. Can the rebound continue? Or is this another bounce to sell?

Technically, we can see that the downtrend is well-intact but there has been solid pop. There is no significant support until 1.1637 so much of the market is focused on that target.

Looking at the Bollinger Bands, they show that the euro has traced along the bottom for some time now but there have been periodic rebounds to the upper band. We see some scope for a rebound to the mid-point, at roughly 1.23 or even the upper band, which should trend down toward 1.2450.

On the other hand, it would be no surprise to see the euro continue falling. Many of the corrections have been very shallow and today’s price action suggests we could be heading lower again.

First, we would like to update yesterday’s post. We noted that USD/JPY was gearing up for a big move and that is exactly what happened. We were cautious on the early move (especially since we had a slight bias to the downside) but once the news that Japan’s Prime Minister quitting hit, we knew which way this pair was heading. His replacement will likely be Fiannce Minister Naoto Kan, who has been quoted as saying he prefers a weaker yen. It seems as though the technicals and fundamentals are aligning for this trade. A strong U.S. non-farm payrolls report on Friday will likely lead to another leg higher.

The U.S. dollar has been strong today but it has been badly outpaced by it’s northern neighbour as Canada’s loonie has led the forex market. If we get a daily close below 1.0414 we see it as a bearish signal.

The Bank of Canada hiked interest rates on Tuesday but didn’t commit to further rate hikes and we saw a disappointment trade combined with a risk averse environment that left a negative technical picture. We were thinking about entering longs but today’s impressive rally in CAD has taken us aback.

We are now back below the key 200-day moving average. The pair is about to hit some significant technical support at the 100dma (1.0330) followed by trendline support and the old range bottom of 1.0205.

Still, we find it very hard to be long USD/CAD after today’s price action. We caution against agressive shorts because today’s move seems so out of the ordinary. A close above 1.0414 and we might wade into a long position with a very tight stop. If we close below that level we start looking for ways to short the pair.

Yesterday we pointed out the weakness in the Australian dollar and noted the bearish patterns. AUD/USD went on to fall badly. Today, we are looking at EUR/AUD and an interesting weekly chart.

The downtrend in this pair has been clearly and cleanly in place for 10 months. On Wednesday we went from the bottom of the range to nearly the top in a one-day 600-pip move. This is a positive for the euro on this cross but it doesn’t yet signal a reversal. Instead, it looks more like a short squeeze. Watch for a test of the top of the range in the day ahead but look for heavy selling around 1.50. Gold is very important to this pair. With the $30 fall in gold on Wednesday, we are cautious of a further pullback, which would be bearish for AUD.

The currency market seems to have disconnected from stocks, bonds and the broader correlations are stretched. The AUD and NZD were beaten down badly today while the EUR and GBP rallied, throwing a wrench into the risk-aversion/risk-appetite trade. We have to note that when correlations start to break down, as we’re seeing, it’s a sign of very high uncertainty in markets. It often leads to high volatility and quick moves. We see no end in sight to the incredible trading opportunities that are presenting themselves every day.

The Australian dollar fell to an 8-month low today against the Canadian dollar, breaching technical support and breaking out of a 3-cent range. This commodity currency cross is one of the least volatile trades in the forex market because eliminates much of the ‘risk’ trade and allows market participants to focus on the relative strengths of Australia and Canada. Last week, Canada posted the largest one-month gain in jobs in history and that has increased speculation that the Bank of Canada will hike interest rates in June. On May 12, Australia will reveal its April jobs report. The market is expecting  22.5K new jobs. The strength of the report will be a big factor in whether the Reserve Bank of Australia raises interest rates. The market, however, is showing that it expects the Bank of Canada to hike rates more than the RBA in the coming 18 months.

As we can see, the pair carved out a rough range between 0.9178 and 0.9475 (297 pips) since the start of the year. Today, the range broke to the downside after higher-than-expected Chinese CPI cooled optimism for the Asia-Pacific region. Technically, the measured target of the range and breakout is 0.8881, which corresponds very well with the 38.2% Fibonacci retracement of the huge March 2009 to Nov. 2009 rally at 0.8867. Other support includes the July 2009 major low of 0.8796 and the Aug. 2009 low of 0.8983.

Short-term momentum indicators show the pair as oversold. The RSI has fallen to 28.70 and we are beyond the lower reaches of the Bollinger bands. That indicates that the market is potentially oversold in extremely short-term durations. It should be noted, however, that momentum indicators usually flash overbought/oversold signals after a range break.

Beward of tonight’s Austrlian employment report.

We worried about the euro in our post yesterday and it appears our worries were well founded. The European session led to a huge short squeeze in the euro, pushing it briefly above our resistance level at 1.3016. The gains were short-lived, however, and the euro has plunged back below 1.28.

We can see the huge reversal on the daily chart. The implications going foward are bearish. The Eurozone rescue efforts won’t be seen as a failure unless we fall below the 1.2521 low from May 5 but at this rate it won’t take long.

Analysts around the world were quick to dismiss the rescue efforts. Some noted how the 750 billion euros will be enough to cover funding needs for Greece, Portugal, Spain and even a portion of Italy’s deficit over the next three years but others noted that the required deficit-cutting and growing public unrest in Germany and Greece are threats.

We won’t argue with the market’s reaction. The European sovereign debt crisis will be over when it’s over. Some stability above 1.2521 will be a good sign but until we see a close above 1.3016, we will remain in the bearish camp.

USD/CAD was unable to retake the 1.02 handle in two attempts earlier in the week and has once again turned lower. The conditions are now right for further USD/CAD declines and likely a new low.

The move higher in the USD touched off the upper Bollinger Band but was unable to close at that level. With risk appetite looking strong and the potential for a huge bailout for Greece, we think Canada’s currency stands to gain.

The RSI shows absolutely no oversold conditions in the U.S. dollar. Our first target is the cycle low at 0.9936. That will likely be tested in Friday’s session or on Monday. We will be trading this with a very tight stop at 1.01. A rally above there will most likely lead to a third test at 1.02.

We have to give ourselves a big pat on the back for yesterday’s call on CAD/JPY. It was the best trade in the forex market over the past day as it rallied 237 pips.

Here is the updated chart:

There is nothing not to like about this chart. The sell off on Friday is followed by a perfect morning star formation with a close above Friday’s open. Moreover, the move higher stalled just at the former support line. We said yesterday that our initial target was 93.50 and the market topped out at 93.60 before pulling back.

The catalyst for the move higher in CAD was a hawkish Bank of Canada statement. We foreshadowed this in yesterday’s note. Here is what the BOC said about its conditional committment to keep rates low until the end of Q2: “The need for such extraordinary policy is now passing, and it is appropriate to begin to lessen the degree of monetary stimulus.” 

For the yen, the catalyst for the slump was the positive tone in equity markets. Stocks worldwide have rallied about 1%.

Now that we’ve taken up plenty of space lauding our efforts (we wish they all went this perfectly) the question is, where do we go from here?

We continue to like long CAD positions. The absolute best time to buy a currency is when a central bank embarks on a tightening cycle. Here we are at the very precipice of what could be a long-term move higher in interest rates.

In the short-term, however, the situation might be stretched. We will definitely be holding long positions but looking to add on any weakness for a move to our target of 100. The market is struggling at the aforementioned trend resistance and we may see some consolidation down to 92.80. That would be our initial buy point. We would cover on a move down to 92.50 because that would target 92.05. If we do see a move to the low 92s, we will be adding agressively.

For so long, the Australian dollar and New Zealand dollar have traded in near tandem. Now, there has been a huge divergence.

Today, the New Zealand dollar was among the worst-performing currencies while the Australian dollar and Canadian dollar were among the top gainers.

The story is also one of divergence. The Reserve Bank of Australia continues to raise interest rates while the Reserve Bank of New Zealand has held rates unchanged for more than six months.

It’s also clear that New Zealand’s central bank doesn’t want the NZD to appreciate and has made pains to emphasize that its economy isn’t as strong as Australia’s.

Technically, a divergence like the one were are seeing is often a reason to set up trades that benefit from mean reversion. We don’t think that’s the case here. We are emerging from the worst economic crisis in a generation. The recovery has been like a tide that lifts all boats. Now, the market is in a stage where it has grown more discriminating.

So far, the CAD and AUD look like winners. NZD may prove to be a winner as well but so far, it’s lagging and expect the performance of the NZD to continue to reflect that.

USD/CAD has formed a short-term head and shoulders reversal pattern that targets a re-test of last week’s low of 1.0060.

The set-up for the Canadian dollar is looking good on Friday’s session. European leaders appear to have cleared up some of the uncertainty regarding Greece and that could lead to a ‘risk-on’ session.

With a stop at 1.0250 and a take profit at 1.0080, this trade has a potential loss of 38 pips and a potential gain of 130 pips so it stacks up right for us. Selling USD/CAD has been a good trade for us all the way down and this is a new, and attractive tactical entry.

Whippy markets can be both profitable and fileld with pitfalls as we have seen over the past week. Extreme volatility in GBP has been a difficult trade that fortunately we were able to profit from before giving a small portion of our gains back.  Still, the highly volatile action in GB and EUR has left us looking for something with a bit more directional bias.

For a low volatility trade, little beats AUD/CAD. These two almost always move in tandem against other currencies but also trade against each other. Lately, AUD is looking tired against the Canadian dollar.

Stochastics are sendign mixed signals but the AUD has now fallen below the 200-day, 100-day and 50-day moving averages as well as tracing out a convincing downtrend since peaking at 99 cents.

This gives us an opportunity to set up a short AUD/CAD trade with a stop at 0.9450 and a target of 0.9000.

Fundamentally, the market is just starting to price in Bank of Canada rate hikes, while having already fully priced in a further 100 basis point hike to 5.00% from the RBA. We feel that if the risk trade falls apart the 100 basis points that have have been priced in from the RBA are vulnerable. Meanwhile, the measley 25 basis points priced in for the BOC won’t have as big of an effect. On the other side, if we continue to see strong global growth, the BOC will inevitable close the 375 basis point spread between central banks.

The Reserve Bank of Australian unexpectedly held rates at 3.75% on Tuesday, disappointing the unanimous consensus fall of economists. All 20 economists polled were wrong and the AUD fell hard on the unexpected move from RBA Governor Stevens and Co.

Since Jan. 1 the AUD is down 4.25% against the yen and after a blockbuster year in 2009, we have seen the first signs of cracks in the Australian dollar fortress. Last year was the yen of the Aussie as it beat every other G10 currency and gained a staggering 20+% against the buck, yen and euro.

Now, the AUD is hovering just above the 200-day moving average against the yen.

The AUD is also bumping up against the 200dma against the Canadian dollar as the CAD threatens to take over the leadership in the commodity currency space.

Watch this space closely in the coming days. At the moment, we are biased to expect the AUD to hold above the 200dma, especially against the yen. A clear rejection would be a bullish signal but we would not hold longs on a breakdown.

We were taking a look at the hourly charts across the majors and this one stuck out.

We saw some very impressive moves last week and thankfully, we were here to offer some great trade suggestions. Every trade we highlighted last week was a profitable one and we’re looking for more of the same this week.

After the big breakdowns last week, we’re looking for some signs of retracement. We like AUD/USD because in the panic last week, a lot of Aussie positions would have likely been tossed out with anything else that looked like ‘risk’.

Now that the market has settled somewhat, the focus will shift back to fundamentals and Australian has the best fundamentals of any advanced economy.  We are aware of the upcoming Australian CPI data and we warn that the risk averse would be wise to trade around it as it has the potential to whipsaw the market.

Back to the chart…. To us, this looks like it could be the beginning of a nice short-term trade with very limited downside.

We have drawn in support from the recent lows and we note that we have seen three (or even four) consecutive higher lows. We also like the look of the reversal candelstick bottoming just below 0.9000. We have yet to see a higher high but we are encouraged that the market didn’t break down after a clear double-top at 0.9092. The market looks poised to test 0.9092 once again and if it breaks, we can see a quick run to 0.9145 (at least).  On a short-term trade, we wouldn’t risk more than the trendline shown but AUD bulls might put a stop at 0.9000.

In the medium-term, we’re still bearish on AUD but with think there’s the potential for a quick, low-risk trade here.

You can’t always be first to the party but when it’s the best party in town, there  will be plenty of good times to go around.

UBS is out with a note advising clients to short EUR/GBP today at 0.8815 on concerns about Greece’s deficit and dovish rhetoric from the ECB. They also expect an economic recovery in the UK. They have a target of 86.00 and a stop at 89.30.

We have been watching this chart and if it makes sense fundamentally to UBS, it certainly makes sense technically to us. The target and stops seem relatively arbitrary but strike a nice balance between risk and reward, so we won’t quibble with them too much.

Here’s a look at the daily chart with the target and the stop drawn in:

We can see that a top occured around 0.94 and that morphed into a flag formation that is actually bullish but with the break of support at 0.8833, it turns ugly and points to further losses.

As a short-term trade, it takes some nerve to jump in right now. We have seen five consecutive days of declines and the technical  momentum indicators are looking severly oversold. We are reminded of AUD/JPY recenly, however, and that moved in a straight line for 11 consecutive sessions.

Conservative traders might look to sell a rebound at 0.8850, risking only 80 pips while agressive traders are likely to see a set-up that’s too good to miss, even if there is a potential for a sideways, choppy trade before we see the big move down. With UK CPI upcoming, the big move could be sooner rather than later. In any case, this is probably a party you don’t want to miss.

We are in the midst of a powerful reversal in USD/CAD.

After breaking key support at 1.0406 and falling as low as 1.0367, we have seen an immediate and powerful reversal to as high as 1.0578 today — a more than 200 pip move in just over 24 hours.

The reversal has created a bullish reversal pattern on the daily chart.

The final three candlesticks create a textbook hammer reversal pattern that is confirmed by a bullish engulfing candle. Reversal patterns really don’t come any more clearly than this one but further confirmation would come with a close above 1.0509. If that’s the case, a retest of the top of the range at 1.0750 will be the favoured scenario.

The pound sterling fell for the fourth straight day on Tuesday as the U.S. dollar continues to make broad gains. Tuesday’s action was notable because GBP/USD declined below the 200-day moving average. The last time sterling fell below the 200dma, it went on to fall 6000 pips in the following two months.

We talked about cable just last week, noting that it was setting up for a big move. We recommended pivoting around 1.6378 and that proved to be good advice. After a quick headfake to just above 1.6400, it fell precipitously. We even warned about a false breakout. If you had sold at 1.6350, you would have made nearly 400 pips by now.

Sterling has fallen below the range we outlined there and the measured target of that move is 1.58, leaving a potential for 200 more pips of profits. We caution that it’s a dangerous market at the moment because of the lack of liquidity around the holidays. Keep your stops tight.

Let’s take a closer look at GBP/USD and outline some potential scenarios.

We can see the 200-da moving average in red. We also see major support (in blue) at 1.5707. This is a potetial target for the recent move but with the Bollinger Band already stretched and the RSI in severely oversold territory  32, we have a hard time envisioning a fall below 1.157 without a correction a period of consolidation first.

The hourly chart offers reasons for continuing bearishness in the short term.

Here, we see that the slow stochastic has climbed back and in danger of rolling over. The key resistance points we see are noted here. They are 1.6029 and 1.6100. The downtrend is also key.

There is no longer any doubt. The eight-month uptrend in EUR/USD is over. The chart is broken.

The only question now is: how far will the euro fall?

What we see on the daily chart is that the euro had a strong, steady uptrend that was broken in early December and has been sliding since. Thursday showed a big drop but Friday showed some stabilization, generating a doji star formation that can sometimes indicate a reversal.

When we look at some associated indicators, they show that the euro is severely oversold. The daily Bollinger Bands (in blue and green) show the euro driving down the lower Bollinger. The slow stochasic (red and orange) is deeply in oversold and the RSI has broken down.

All these indicators tell us that there will be a rebound in the euro at some point but our experience also tells us that markets can remain oversold for long stretches at turning points in a market.

The target we have been eyeing through this entire trade is the 200-day moving average (red). It comes in at 1.4187 today, which is nearlywhere the lows from August and the psychological support at 1.42 comes in.

It will be very tempting to go long EUR/USD in the next day if we see these levels. In a deeply oversold market, such convergence of support is generally a great place to put orders and hope they get filled on a sharp drop in the market. If those support levels give way, we wouldn’t rule out a drop to 1.39 in the near term.

Confirmation of the rebound will be found on the hourly chart, where we can see a well-definted downtrend.

We can see that this trend has been tested at least 4 times. It should pose initial resistance to any rebound in this pair. If it’s breached in the near-term, expect the 38.2% Fibonacci retracement level at just below 1.46 to be the next target. Those looking to sell a rebound in EUR/USD will start piling in at that level.

Overall, this is an exciting chart that will continue to add volatility and intrigue to the forex market in the coming weeks. The euro is definitely in a severe retracement following the past 6 months of gains but it’s growing oversold and market participants need to be prepared for a bounce.

The U.S. dollar is surging. We saw impressive moves all over the forex market on Thursday and with the big slide in stocks, more is likely on the way. If not through the holiday season, we will be seeing it in the New Year.

The euro and pound sterling have already broken down and USD/JPY has had a huge rebound. AUD/USD has fallen below support as well.

One chart stands out as particularily tranquil — USD/CAD.

When we see a chart like this in a volatile market, we get excited. There is a well-defined range from 1.04 to 1.0750 that has been well-established since early November. We have been watching this range trade unfold and wondering which way it would break.

Now, the clear indication is that it’s going to break on the upside. We see a strong series of higher lows and we are brushing right up against the top of the range. All around we see USD strength. Also hurting the Canadian dollar are slides in oil, gold and other commodities.

At the moment, the picture is very clearly bullish. A breakout through the top of the range would immediately target 1.0850 but 1.11 would be a more-likely result.

But wait, we are approaching the holidays and liquidity is going to dry up very quickly. The U.S. bulls may decide to take a break. If so, Thursday’s failure to break above 1.0750 will be seen as a definite sell signal. In that case, we could easily see USD/CAD falling back to 1.04, or lower.

Taking a look at the short-term intraday chart gives us reason to think that’s exactly what might be coming.

What we see here is a 15-minute chart that has reversed mightily after hitting resistance. The line coming in at 1.0636 is the 61.8% retracement of the push to 1.0750. A fall below there would likely mean a defeat of the attempt to break the range on the upside.

Overall, the picture remains bullish for the U.S. dollar and a break through the upside of the chart is the most favoured scenario. Oil and stocks both look vulnerable and further weakness in those two would almost certainly end the range trade to the upside.

In the meantime, keep a close eye on this chart and be prepared for a powerful move. It has happened everywhere else, and it’s bound to happen in USD/CAD too.

The pound sterling has our attention today. We have been keeping a close eye on this chart since it broke down at the start of the month and began to form a range trade.

Since Dec. 8, ther have been a five consecutive days where the candlesticks have shown indecision. The first three are clear doji stars and the following two are as well, when taken together.

Now, we have pushed to the top of the range and set up one of our favourite types of trades.

Doji stars are a great way to key in on what is usually a big move. When a market ranges like GBP/USD has, a breakout is usually a powerful event. When a range becomes established, it also gives you good, clear guidelines on where to put your orders. In short, a series of doji stars followed by a push to the upside are a technical traders’ dream.

So what’s the trade? Will GBP/USD breakout and shoot higher? Or will it go back to the bottom of the range?

On the daily chart, we can see that the RSI and stochastic are both showing bottoms and turning higher. But let’s take a look at the hourly chart.

This chart is showing the opposite — the RSI and stochasic are overbought. This is called divergence. It’s when two different charts are giving different signals and unfortunately, it’s common. In a breakout scenario, it’s almost inevitable.

Taking a closer look at the hourly chart, we can see that the parameters of the range are from 1.6167 to 1.6373. Already today, we have come very close to the top of this range but as we can see, it’s offering strong resistance.

The way to play both sides of this trade is by trading with very tight stops. One way to do it is sell the top of the range with a stop 15-20 pips above. If the stop is hit, turnaround and go long. This leaves you vulnerable to a false breakout but allows you to profit in either direction.

A variation of the same trade is to but a buy order in 10 pips above the range with a stop 15 pips inside the range. If you get stopped out or if the market breaks down and starts to fall back into the range, you can spin around and go short at around 1.6350.