The U.S. dollar has made four big moves higher in the past four days. In the process, USD/CAD has risen above downtrend resistance and the mid-July highs. At the moment, the USD is overbought so we would advise waiting for a down day to establish long positions.

The RSI, at 68.42 is nearing the same levels as the spike high in May and if recent history proves correct, we will likely see a move lower (possibly back to as low as 1.04) before we see a renewed push higher.

Fundamentally, there is a similar story about to play out. The Bank of Canada meets September 6 and the market is pricing in a 45% chance of an interest rate hike. We expect that economic worries and market jitters will force the Bank of Canada to reconsider raising rates. At the moment, 100% of economists survey expect the BoC to raise rates. With recent Canadian economic data trending lower and no inflation worries, the BoC is likely to change course. Alternatively, they make hike rates by 25 basis points but make it clear that there will be no further rate hikes. In either case, the Canadian dollar will weaken (and USD/CAD will rally).

We expect to see 1.13 at some point before the end of the year.

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.

We have been advocating short positions in USD/JPY all the way down but looking at today’s chart it’s clear that some caution is warranted. The pair is stabilizing and oversold conditions point to a rebound.

Today’s daily candle forms a bullish hammer reversal pattern. It also forms a double-bottom at 86.96, which was also the low last Wednesday. Further strengthening the case are a multitude of oversold signals, including the RSI, which is just a shade above 30.

A bullish retacement phase would be confirmed by a rally above resistance at 88.05 – 88.15. A reasonable retracement would be back up to 89.25. On the other hand, if we are unable to rally above resistance at 88.05 in the next day or two, we would expect a swift fall toward 0.8450.

Cable ran into resistance today at Friday’s high and then immediately turned lower, putting in a double-top on the short-term charts.

Technically, this is bearish but most of the downside has already occurred. GBP/USD is in a medium-term uptrend within a channel. We see the channel as the dominant feature on the chart with the double-top as a secondary feature.

In the short-term we expect to see a continued slide in the pair but expect uptrend support to hold. We think that will provide an excellent buying opportunity for an eventual move to 1.55.

One week ago, we talked about the potential for USD/CAD to rally and that is exactly what has happened. The initial catalyst was a soft report on Canadian retail sales but the broader move has been driven by international worries about a double-dip recession.

We noted that Canadian fundamentals remained strong but when we looked at the chart, it was clear the U.S. dollar wanted to go higher against CAD. What happened? We have rallied from 1.0393 to 1.0639.

The 200-day moving average has given way, downtrend resistance was only a hiccup and we are nearing our initial target of 1.0678. We would take profits on longs initiated below 1.0450 because we think there will be some consolidation here. We see a push to 1.0650 in the coming day but expect that to be the top for the next 2-5 sessions. Initiate shorts at 1.0650 or look for a pullback toward 1.0550 as an opportunity to establish fresh longs for a push toward our eventual target of 1.0850.

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.

Today’s price action was the signal we were looking for to mark the top in EUR/USD. We had a blowout to the upside that has aggressively reversed.

The main news of the day is that China will allow the yuan to appreciate against the USD. Analysts are scrambling to interpret the news and the market has been equally undecided. The U.S. dollar has been a main beneficiary on sentiment that U.S. manufacturing will be more competitive. Initially, the stock market liked the news but a stronger yuan probably means slower worldwide economic growth so that sentiment appears to have taken over.

The idea that China is curbing growth and inflation is weighing on the EUR. There is also a feeling that the entire up-move in EUR/USD was fuelled by short covering. CFTC data released late Friday shows a massive contraction in EUR net shorts so there is evidence that the slump has been little more than position squaring.

The daily chart now shows a downside reversal. We also see an inverted hammer pattern. Confirming the downside is the resistance at the top Bollinger Band, the RSI and the 50-day moving average.

The Australian dollar rallied on Monday to the highest since May 19, breaking a above resistance and building a convincing double bottom that could point to a 500-pip rally.

AUD/USD took off right from the open of trading on Monday, steadily climbing to a high of 0.8667. It has since pulled back but the close of 0.8587 was above key resistance at 0.8552. The implications are undoubtedly bullish. We have outlined a double bottom formation that targets 0.9046. The measured target coincides with resistance points at 0.9024 and 0.9074. There is also the 200-day moving average to overcome (yellow) it sits at 0.9110 currently.

The first obstacles, however, will the 50-day and 100-day moving averages at 0.8816 and 0.8952 respectively. We don’t expect a clean break to the upside with the stochastics showing highly overbought signals.

Over the next few days we could see some consolidation but barring a sharp move to the downside, we see a gradual decline toward 0.9000.

The euro has started out the week by rising the highest since June 4 as it builds on a rally for the past week.

Over the past six months it has been rare for the euro to string together several up-days. We remain extremely bearish on EUR and will be using this bounce as another opportunity to sell. The question is: when is the right time to sell EUR/USD?

We noted the IMM data released on Friday. It showed EUR net shorts near record just shy of a record high. Remember that IMM data is from the prior Wednesday (in this case June 11). On that day the euro traded at 1.19 compared to 1.2178 currently.  That points to a short squeeze over the past few days. But with the market positioned so agressively short, the squeeze could still have some way to go.
We see three simple targets. 1.2334, 1.2467 and 1.2691. We don’t see the highest target as realistic. Market participants are so bearish on EUR that it will be sold long before it hits 1.26.

Looking at the Ichimoku Cloud on our 4-hour chart we think a somewhat agressive move higher to 1.2567 is possible if we get a close above the top of the cloud (on a 4hr chart).

We will have our sell orders ready, however, once it gets above 1.2334.

Note that the European Union is hosting a summit beginning Thursday. The market will be looking for signals about fiscal austerity and plans for further market intervention.

Yesterday we talked about cutting gold long and waiting for better levels to buy. What happened? Gold fell 1%. We still look for more attractive levels and will be buying at $1200 and continuing to evaluate any moves to the upside.

Today, we are struggling to find a clear trend to latch on to. The charts are not sending a great deal of clear buy or sell signals. Nowhere is this more clear than in USD/CAD.

We don’t see anything here that is sending a clear, short-term signal. We know that the long-term trend is down but we are seeing some sideways indications lately and we’re worried about another push to 1.08.

USD/CAD probed the downside today but we had a sound rejection well above support at 1.0333. That move has got us thinking about entering into a long position but we don’t see the right risk/reward ratio. We could see a track up to 1.0580 or 1.0600 but on the downside we want to see 1.0333 broken before we get bearish.

Looking at other charts, it’s similar. There is not a great deal of momentum anywhere. We take that as a signal that the market is unsure. Traders are looking for clear reasons to buy and sell.

In the day ahead we have the ECB and BOE interest rate decisions. That could be a catalyst. Our bias is that risk aversion is on the way up. Stock markets were set up for a nice move higher today but wilted. We will wait for clearer signals.

Dollar-yen has been a frustrating pair to trade recently. It can’t seem to find any strong direction. Just when it looks like it’s going to rally or plunge through support, it heads in the other direction. In essence, we have been trading between 89 and 95 since the start of the New Year.

In the longer-term, we expect the pair to eventually trend lower but at the moment, the trend is clearly sideways. In a sideways market, sometimes there are opportunities to put on a low risk trade that takes advantage of a short-term trend. That’s exactly what we see right now in USD/JPY.

This pair sold off on Friday from 93 to 91 but it has rebounded and consolidated in quiet trading today. This is a classic fibonacci retracement. The high earlier of 92.07 is precisely in “The Box” which is the zone between the 50% and 61.8% retracement. We think the spot rate, at 91.64 presents an excellent value on the short side.

Stochasics are showing an overbought signal on the daily and hourly charts with both in the process of rolling over. From a risk management perspective, the trade also presents good value. A stop at 92.15 is a 50 pip risk while on the downside, there is no significant support until 90.54.

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.

We feel the Australian dollar has entered a medium-term downtrend and we want to use the strength in the currency late this week to establish a short position.

AUD/USD rallied in a wonderfully uniform fashion for six month starting in May 2009 and ending in November of the same year with a high just above 0.94. Afterwards we moved sideways for a period before the market broke down over the past month.

An initial drop culminated on May 5 before a short retracement phase. This week, we have seen a similar retracement, bouncing from 0.8066 to a high of 0.8555 today – nearly 500 pips. The rebound is precisely 50% of the drop from 0.9028 that began on May 13. It’s no surprise that AUD bounced to the key 50% Fibonacci level.

This gives us a great level to follow the downtrend but with minimal risk. We would initiate a short position on a fall below 0.8429, which is slightly below the 38.2% retracement level. Our stop would be at 0.8670. The initial target is 0.8100 followed by a much deeper fall toward 0.7500.

The euro once again turned lower today on reports that Spanish banks are unable to borrow and a story in the Financial Times suggesting that Safe — the Chinese government investment fund at holds an estimated $620 billion in euroarea debt — is worried about its investments in Portugal, Italy, Ireland, Greece and Spain – the so-called PIIGS.

The euro tumbled on the news and has fallen below initial support at 1.2177. The cycle low of 1.2144 could be breached imminently and that would be a very bearish signal for EUR/USD.

The pattern that points to further losses is also a classic head and shoulders formation.

The neckline has already been breached and the negative outlook would be confirmed by a fall below 1.2144. The measured target of the head and shoulders is 1.1683, which dovetails nicely with the 2005 low of 1.1639.

Overall, the fundamental and technical reasons are in place to be short the euro. Sell any bounce.

The rebound in ‘risk’ trades today left some interesting patterns. Some look like they could be putting in bottoms, others look convincingly like the trend will continue. We are looking for clearer signals but in the meantime we see some charts that are flashing trading opportunities.

Cable has posted an interesting pattern over the past 10 days, bouncing in a 300-pip range. We will be watching this trade over the next few days and think a break to either side will be a good barometer of the broader risk trade.

As we can see, GBP/USD has traded in a 294 pip range since the gap lower to start the week of May 16. The gap lower co-incided with the election of a new government and we are now getting a sense of the austerity measures they plan to unveil to curb the huge UK deficit. It’s possible that announcements on that front will be what pushes this pair from its range. If the measures are too severe of too leniant, the pound will fall. Poilcymakers will need to strike a plan that’s both credible and promotes economic growth.

Technically, there are two ways to trade. The first is to buy at the bottom of the range and sell at the top. The second is to await a breakout. At the moment, we would favour selling a rally if GBP/USD reaches the top of the range and covering a portion at the bottom of the range. Playing a breakout is also an attractive strategy. The measured target of a range-trade breakout is equal to the range, so a fall to 1.3940 or a rally to 1.4822 is expected.

We are trading very well at the moment. We have repeatedly warned about the Australian dollar and our downside targets against CAD and USD have been met. We were impressed by the continued weakness against the euro today and it looks like the bearish phase in the euro against the commodity currencies might be coming to an end.

Today, we want to focus on gold. For years we have been skeptical of gold bugs and their prognostications of $5000 gold. It’s a group that’s filled with conspiracy theorists and worry-mongerers.

In the last siz months, however, we have grown more and more convinced that the gold rally is just getting started. Sovereign debt worries are for real and many countries will eventually give in to inflation as a solution to their overspending. The implications are unambiguously bullish for gold.

After reaching all-time highs last week, gold has slumped. For us it’s not a matter of buy or sell, it’s only a matter of when to buy and when to take profits. At the moment we are looking for buying levels.

We see that the RSI has fallen into oversold territory but it could still fall lower. On the downside we have the fibonacci lines at roughly $1170, $1150 and $1120.  We also see various trendlines with the most meaningful one (to us) at $1140 currently. On the whole, we see a great deal of support in the $1120 – $1170 range but support thins out below that.

We will be stacking up buy orders in this range on the possibility of a quick spike toward the bottom of the range. If we see a fall below $1120 we may be forced to reconsider.

The U.S. dollar made strong gains against the yen on Monday but was unable to close above a key resistance line. The pair briefly traded at its highest since August but gave back a portion of its gains to close below of the April high of 94.69.

We remain long CAD/JPY but note that even though CAD was the leader in the forex market today and JPY was the laggard, the pair was also unable to break out.

In any case, the price action was short-term bullish. Friday’s slump in stocks and late-day plunge left us questioning our negative JPY bias. It also set up a bearish spinning top formation on the daily charts. Monday’s trading neutralized that though and painted a conditionally bullish picture.

The key in the day ahead remains the resistance at 94.69 stretching up to 94.78. If we see some stops blown out we will be encouraged. What makes us hesitate, however, is that Japan is on holiday until Thursday because of the Golden Week festivities. Holiday trading is treacherous and prime for false breakouts.

If the market fails to make a clear break above 95 before Thursday’s Asia-Pacific session we will be very cautious. The Golden Week is traditionally a down time for JPY so we are on guard.

Friday’s washout in CAD/JPY sent the pair down to key support. Today’ we traded below that support level early in teh session but later rallied to close higher. The rebound coincided with significant support, including the top of 80-90 range that was in place from June 2008 to mid-March 2010. It also touched off the 38.2% fibonacci retracement level of the rally we have seen since late February.

This chart looks very positive to us, as long as it stays above 90.00. That leaves a downside of 107 pips. On the upside, we see the potential for the chart to rally to 100 with 93.50 as an initial target.

The major risk in the next day is the Bank of Canada decision. We believe this chart is incorporating the hawkish bias we expect from the BOC. Policymakers in Canada have committed to keeping rates low until the end of the second quarter but with June fast approaching, we expect the Bank of Canada to show the first indications that it will embark on a rate-hiking cycle starting in July.

The risk is that the Bank of Canada emphasizes that it wants to continue to keep interest rates low. In that case, CAD/JPY could fall very quickly and we would want to exit the trade and re-evaluate.

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.