North American markets got a big boost from news that BHP Biliton had proposed a $37 billion takeover of Potash Corp. The takeover suggests corporations are willing to invest and spend, something that has been up for debate. Companies have been hoarding cash, unwilling to hire or invest due to the uncertain economic environment. If the move by BHP is the start of a trend, it will signal growing corporate confidence in the worldwide economy – something that will boost AUD and CAD.

There is a downside bias as USD/CAD consolidates in a wedge formation. A drop below minor support at 1.0305 would point to further losses for the U.S. dollar against its Canadian counterpart.

For the Australian dollar, the candlestick patterns are bullish in the short-term but a buy signal won’t be confirmed until 0.9081 is breached. With Asian markets risk averse at the moment, there may be good value in establishing longs if AUD/USD drifts toward 0.9000.

Despite its status as a growth currency, the Canadian dollar is holding up relatively well early in this week’s trading. To us, this looks more like a reflection of a slumbering, mid-summer market than any reflection about Canada’s economic strength.

Usually, the Canadian dollar moves in tandem with the Australian and New Zealand dollars but we’re not seeing that today. Instead, USD/CAD is chopping close to unchanged. Typically, when European and North American traders get to their desks, the pair will play catch-up. This is especially the case at this time of year when many traders are on vacation. That makes it a great time for independent traders to front-run the market.

On a daily charting basis, CAD  is carving out a wedge formation. Friday’s bullish hammer reversal candlestick points to further gains but they may be capped at psychological and downtrend resistance at 1.0494 – 1.0500. We feel like this chart is gearing up for a huge move but it may take some time to develop.

The euro is not oversold from a daily perspective but it is approaching some solid support levels that could provide quality buying opportunities.

On Wednesday, the euro’s nearly 300 pip fall against the U.S. dollar was the largest one-day fall since September of 2008. That’s worse than any single day during the European debt crisis. Without doubt, we see the euro moving lower from here in the medium term. In the short-term, however, we are nearing uptrend support and support from the June low of 1.2737.

We could see a further slide close to support on Friday, especially if U.S. retail sales disappoint. But looking to next week, there is very little on the data docket to spook the broad market. To us, that skews the risks toward a mild recovery trade. With that in mind, we would look for opportunities to buy the euro at below 1.28 with the expectations that we will see a re-test of 1.30 in the week ahead. If the euro does return to 1.30 we will be quick to take profits and initiate short positions for an eventual fall to new lows.

Risk aversion and the Fed’s announcement of further quantitative easing have pushed USD/JPY down through support to the lowest level in 15 years. Japanese officials expressed concerns in the Asia-Pacific session about the rising yen but that has done nothing to slow the rally. Japanese Finance Minister Noda told reporters in Tokyo that recent moves in the yen have been “a little bit one-sided.” Meanwhile, Japanese Trade Minister Masayuki Naoshima said that deciding on FX interventions is difficult in an interview with Jiji Press. USD/JPY fell as low as 84.73 but was most recently down 47 pips to 84.97. The pair fell as low as 84.83 in November 2009 during the height of the credit crisis but USD/JPY hasn’t traded below since 1995. If the pair can close below 84.83, it will be an extremely bearish signal.

A reason for the weakness in USD/JPY is that U.S. growth in the second quarter may have been far worse than the 2.4% pace that was initially estimated by the Bureau of Economic Analysis. Two surveys private economists show they are expecting more than a full point of revisions. Bloomberg has just released a survey suggesting growth will be revised to 1.2% but it’s based on just four responses. Similarly, Dow Jones has a listed consensus at +1.3% (it’s unclear how many were surveyed). After four quarters of contraction, the U.S. economy grew at a pace of 1.6% in Q4 2009 followed by quarterly readings of 5.0%, 3.7% and the most-recent 2.4% rate. It appears that growth is stalling as government stimulus fades. With momentum clearly slowing, more questions will arise about the possibility of negative growth and recession. Slower-than-expected inventory builds are a large part of the downgrade. Today’s unexpectedly large U.S. trade deficit for June will also hurt. One notable market watcher is saying today that growth could be revised to as low as +0.5%.

We expect a bounce in USD/JPY in the immediate term but will be looking to sell. We will also sell on a close below 84.83 with an eventual taget of the all-time low at 79.90.

USD/CAD attempted to break down below support yesterday but was harshly rejected. The fresh uptrend has continued in today’s session and the technical outlook is looking increasingly bullish.

We can see a rough outline of a hammer reversal pattern yesterday and a more clearly defined hammer today. Support comes in at the 100-day moving average (purple) along with the Jule low of 1.0277 and uptrend support from the low in April.

Initial resistance resides at the 200-day moving average (red) but we don’t think that will pose a serious hazard to bulls. Instead, look for an inital rise to downtrend resistance at around 1.0570. Place stops below the 100-day moving average as another test below will likely see follow through.

The strongest trend in the forex market at the moment is a falling USD and rising JPY. USD/JPY has been declining for nearly 11 weeks. This will be a big week in terms of U.S. data and there is talk that Japanese officials may intervene in the market is USD/JPY falls to 85.00. Watch for U.S. data on consumer confidence, durable goods, the beige book, GDP and the Chicago PMI. If the outlook continues to darken for the U.S. economy, look for this pair to continue sliding.

U.S. Federal Reserve Chairman Ben Bernanke roiled markets last week when he uttered that “the economic outlook remains unusually uncertain.” Markets take their cues from the Fed. Remember it was Bernanke’s comment in April 2009 about “green shoots” that helped prompt a huge turnaround in financial sentiment. Many traders stand by the old adage “don’t fight the Fed.” What Bernanke’s comment meant was that they are in data-watch mode, unsure of which direction the U.S. economy is headed. “We will continue to carefully assess ongoing financial and economic developments,” he said. His comments have focused the market’s attention on incoming U.S. economic data. As a result, the U.S. dollar is moving more than usual after economic data releases. We are seeing solid rallies against the yen on stronger economic data and deep slumps on soft figures. An “unusually uncertain” market is prone to big moves whenever there is a hint of clarity. Keep an eye out for signs that make the outlook more certain, for better or for worse.

AUD/USD had made a bullish breakout of the double-top at 0.8869 and appears poised for a test of the 200-day moving average.

Positive news out of China continues to boost the Australian dollar. Officials in China today upgraded output growth forecasts to 13% from 11% and said they will act to stimulate consumers in the second half of the year. In all the excitement about the German PMIs and U.S. corporate earnings today, these headlines have been overlooked except in the forex market. This is very good news for Australia as it ships much of its raw material exports to China.

Technically, this chart is now looking outright bullish.

In the short-term we will likely see a retracement close to 0.8869 in a classic ‘buyer’s remorse’ move. Afterwards, however, we expect a quick rally to the 200-day moving average at 0.8967 and eventually to the mid-May high of 0.9077. We can’t rule out a re-test of the cycle high at 0.9420.

Our trading in USD/JPY has been outstanding. We have picked several turning points in a row and we’re feeling good about calling another one.

The yen is the laggard (USD/JPY strength) after an election loss for the ruling Democratic Party of Japan ramped up worries about political instability.

The DPJ, which has been ruling for one year, was beaten badly and fell to 44 seats compared to 51 for the Liberal Democratic Party. Smaller parties have already ruled out any coalitions that would ensure the 56 seats needed for a majority. The Lower House is the power-base of Japanese politics but the loss will hamper policy-makers and could stall or kill a proposed sales tax increase that would help to put Japanese finances in order.

Frankly, we haven’t been that impressed with the sell-off in JPY despite the disastrous election result. We see the recent USD/JPY strength as a standard retracement and the 50% Fibonacci retracement is already providing resistance. The measured target of the double-bottom at 86.96 has been met.

There is some talk that the DPJ’s loss could help to boost the yen. Prime Minister Naoto Kan has in the past said he is in favour of intervening in the forex market to weaken the yen in order to boost exports. Due to the election loss, there is growing speculation that the DPJ may push for a leadership change in a September party election.

Technically, the more powerful indicators are pointing lower. Sell here.

The Australian dollar has made three strong pushes to the upside over the past three days after the RBA rate decision and better-than-expected employment data. Short-term signals are flashing some overbought signals but the move higher is generating bullish signals.

We can now see two clear double-bottom formations. One at 0.8062 adn one at 0.8314. In today’s trading we broke above downtrend resistance and AUD/USD is now squarely targetting resistance at 0.8861.

We feel as though we are late to the Australian dollar bullish camp but we can’t fight this chart. Some measure of consolidation is likely in the coming day but we will be eager to buy any weakness with an initial target of 0.8850 followed by a test of 0.9000 or the 200-day moving average.

On hourly charts, we have moved into highly overbought territory and that gives us some optimism that we will imminently see a pullback. On the daily chart, however, the RSI is under 60 and still has a great deal to run before we get into overbought territory.

Concessions from Australia’s government on a proposed mining tax gave a boost to AUD/USD but the moves were short-lasting, something that points to further Australian dollar weakness.

 Mining companies appear to be happy with the watered down legislation and that will contribute to steady investment in the coming years. AUD initially rallied on the reports but fears of a global slowdown appear to be outweighing the kneejerk reaction higher. The chart is also looking bearish.

AUD/USD has fallen from 0.90 to 0.84 over the course of ten sessions, so we are at somewhat oversold levels. We expected  a rebound to 0.86 but even with the good news about the mining tax we got only a rally to 0.8510, not even the 38.2% retracemenet of the down move.

On the short-term chart, we see a downtrend with 0.8509 as resistance followed by 0.8565. With a series of lower highs, we now see 0.8313 as a clear target early next week. Fundamentally and technically AUD/USD is looking bearish — sell any strength.

We are seeing some bullish signals from GBP/USD and will be looking for an opportunity to establish a long position.

It looks like at this point that the market has accepted David Cameron’s budget at face value and has pushed worries about the nation’s fiscal situation to the sidelines.

We have broken above the  100-day moving average, the key 61.8% retracement level and above resistance in the 1.50 zone. It is impossible to ignore such bullish price action. We are now in an uptending channel above the 14-day moving average (red).

We are seeing some signs of consolidation. Today’s price action has been quiet as we trade in a 55-pip range. We see scope for a slide to the 100-day moving average (blue) but would view this as a buying opportunity for an eventual rally toward 1.5524.

The head and shoulders patter we warned about last week was finally completed in EUR/USD as the pair broke down in spectacular fashion today. The catalyst were comments from a spokesman for Hungary’s Prime Minister who said the nation is in a “grave situation” because the previous government “manipulated” data and “lied” about the state of the economy. Turkey isn’t a part of the euro but is on the periphery of the zone. Worries about Spain also ignited and credit default swaps around the region soared.

Technically, EUR/USD continues to be in bad shape. We have frequently advised selling this pair and always advise following the trend. As everyone knows by now, the trend in EUR/USD is lower. We watched over the past week as a host of economists, strategists and commentators advised buying euros. Obviously, they were wrong.

The only question is: how far will the euro fall? The market has squared its focus on the late-2005 low of 1.1639. As we previously mention, this corresponds with the measured target of the head and shoulders pattern.

We think that any entry point is a good one for the coming week but, as the RSI shows, we are oversold on the two hour chart.  It would be no surprise to see a rebound to 1.21 late on Friday or early next week. This would represent a great entry point provided you could withstand a potential short-squeeze to 1.23, which would be our stop. The whole trade represents a potential profit of 450 pips and a loss of 200.

No one is talking about USD/JPY because nothing much as happened in the pair over the past two weeks. What we see is a pair that is ready to make a big move.

For the past week USD/JPY has been locked in a 200 pip range between 90 and 92. The past three sessions have traced out doji stars and the week earlier also displayed a series of indecisive patterns.

It’s time for the market to make a decision on USD/JPY. We believe the trade is to buy on a break above 91.87 and sell on a fall below 89.91 but we also want to develop a bias.

To us, the downside looks more attractive for a short-term trade. The plunge on May 19 was the last major technical move. As such, we are noting that 91.87 (the high from that day) is a significant point of resistance. From a risk/reward perspective, we are only 50 pips from that high but a 135 pips from our most significant support level. That alone makes us baised to trade this from the short side. What’s more is that the slow stochastics appear ready to start turning over.

On the whole, we want to stay nimble with this pair. We think the next move is going to a big one and we are prepared to give up an early portion of the gains in order to ride the momentum. Keep a close eye on USD/JPY over the next 24 hours.

The trend is your friend. We have heard that axiom so many times and we still feel like it can’t be repeated enough when we see a trend like this.

Notice the beautiful, consistent downtrend in this pair. We also have to note that this was the worst performing pair over the past week. It fell 810 pips from top to bottom.

We are now bouncing off the bottom of the channel. Despite the problems in Europe, we see the potential for a bounce here and believe that aggressive traders might want to wade into long positions, with very tight stop losses.

The RSI is not yet extremely oversold but, at 23, it’s close. We’re not sure whether a bounce will come from euro strength or Canadian dollar weakness. We are long-term CAD bulls but the action over the past week concerns us. CAD was the weakest performer on Friday and closed above some key resistance levels. Oil also continues to struggle.

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.

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.

The coast is clear for GBP/USD to continue higher as fundamental and technical indicators point to an extension of the recent rally.

Fundamentally, it’s looking increasingly likely that the Conservatives will secure a majority victory in the May 6 election. Today’s poll of swing electoral districts showed the Conservatives with a convincing lead. Moreover, the market seems to be shifting its gaze away from the debt problems in the UK in light of data showing economic improvement, especially in exports.

Technically, this has all been reflected in the price action of GBP/USD.

The pattern is very similar to EUR/USD but is showing more conviction to the upside. There is a double-bottom at 1.4787 from March 1 and March 27. The neckline at 1.5378 was broken last week and we have gone back and retested it successfully. The measured target of the double bottom is 1.5969, which corresponds nicely with the 200-day moving average (red). Before that level can be reached, there are several technical hurdles to overcome. The most formidable will be the late February top at 1.5815.

Overall, we think this trade sets up nicely and we also like the fact that there has been good volatiliy in this pair and that looks set to continue.

We warned yesterday about the confluence of events and technicals underway in EUR/JPY and said a big move was likely today. The direction wasn’t entirely clear because there was a possibility of a false breakout but we said the bias was to the upside.

We wish we would have ignored the possibility of a false breakout and went long because there was a huge move to the upside today in EUR/JPY. The combination of an inverse head-and-shoulders pattern and the end of the month/quarter/Japanase fiscal year generated a big move in the pair.

Here is the chart. Note how today’s move was the biggest in more than a month.

The good news is, as our strategy pointed out yesterday, that this is just the beginning of a bigger move. The head-and-shoulders pattern is now confirmed. The measured target is 130.77.

We think there might be some pain, in terms of a pullback, but we also can’t rule out a continued rally. We are going long here and are going to look for ways to add to our position. We will be adding all the way down to 125, if necessary.

We have been keeping a close eye on the Australian dollar over the past few weeks and AUD/JPY continues to grab our attention.

Two weeks ago, we warned about the potential for AUD/JPY fall below the 200-day moving average. When it did, it immediately fell 300 more pips before finding support at the quadruple bottom at 76.35-50. It has since rebounded back above the 200 dma to 80 cents.

The move higher has relieved short-term oversold conditions and the overall technical set-up remains bullish for the Australian dollar. We would have a very difficult time going long here, however. A clear quadruple bottom is not something that you see often and it’s usually a sign that a further sustained rally is failing. What has is saying that the chart still looks bullish is the fresh high at 86.50 after the late-November test of 76.50 (a 1000 pip rally).

We don’t want to fight the long-term trend of higher highs in AUD/JPY and we have been impressed by the Australian dollar’s ability to rebound back above the 200 dma. There is no reason to think the AUD can’t go higher in the short-term. At this point, however, we see a rally above 86.50 as unlikely and that will trigger a mixed, or negative technical picture.

We do expect this pair to eventually fall back below the 200 dma and below 76.35. At that point we will be agressive sellers as we could see this pair quickly falling to 67.00.