FOREX TRADING

It Is The Treasury Market Now

Forex Trader Note: The global equity markets have moved higher in recent trade and have been backed by strong oil ($79) and hard commodity moves. The ‘Long Equity-and-Oil/Short Usd’ correlation is not in play due to the fact that U.S. Treasury yields (dollar denominated) are paying close to 4% per year interest, and looking to increase that return in advance of any overnight or discount interest rate increases from the Federal Reserve.

The imbalance between the Fed’s 0.25% overnight rate, and the 4% 10 year Treasury note yield is creating a unique near-term situation that will have the dollar pulled around a little, until fair value is ultimately found against the major pairs.

The U.S. note yield will draw in buyers of the dollar at the same time that sellers of the dollar buy commodities and equities. That creates a huge question mark on dollar index valuations in the near-term, and the dead-lock may well hold until the next major U.S. economic release hits (read Non-farm Payroll, and ISM reports).

This strength of Usd separation between major currencies does not often happen, and is normally only seen at the trough (or peak) of global business cycles, as traders are seeing right now. The markets are at a swing point where the global business cycle is looking to move into a phase of expansion, and each economic region now has to set fair value on its currency, as the market moves away from dollar index trading, and moves towards individual interest rate differentials and forward growth expectations to value forex pairs.

The major pair 4 hour charts are showing tight trading ranges that will act as solid support and resistance areas over the next few sessions. Recent trade has shown Usd weakness, (keeping in mind that the sentiment reads are all oversold against the Usd in the near-term), although 4 Hour momentum reads are still long-Usd on the major pairs.

Tight targets and limited exposure is the name of the game, until we see increasing forex momentum that starts to test the 4 hour trends (Shown in the Global Market Trends and Momentum area below).

The Usd may not be able to make too much headway going long, unless of course the Treasury yields increase exponentially above 4%. What will be interesting to monitor are the days that global equities move lower, and to watch for the momentum coming into to the long side of the Usd as bonds get bought and stocks get sold. The variable is that global commodities look to be setting themselves up for a bull run.

Red Flag Economics:

10:00 EST Usd Consumer Conf Exp 53.0, Prev 49.5

Dollar Index: Recent trade has offered practically no movement at all in the foreign exchange market, with the major pairs trading in tight ranges. The Holiday Season is a period in which institutional players have one either of two mandates; protect existing price areas, or look to gain a little in the last sessions of 2009. On Monday, neither was in play and the market’s reluctance to move the dollar index too far is expected to last over the next few days. A weekly close above 78.50 will signal that buyers are prepared to make the next leg higher, but with long equity and commodity trade, that will be hard pushed to easily happen even with a strong Treasury market yield that will attract Usd buyers. Swing Point: 77.45

S&P Futures: Trading was very slow in the U.S. cash session, with the three major indexes barely moving as most trade desks remain quiet during the year-end wrap, with an important note coming from the fact that sellers were easily held at bay. In the European session, the markets gained 0.50% around the opening bell, and then the regional indexes came to a virtual standstill. A similar pattern was observed in U.S. trade with the futures markets posting small gains overnight, only to then trade flat during the cash session.

The report calendar was empty, and will remain quiet over the next few days, something that helps keep momentum out of the market. The 1125 and 1135 areas will be a major resistance point to now close above this week. The moves to test and hold support are impressive, and now backed with Japanese and German markets that are also looking bullish. Swing Point: 1120

Crude Oil: Crude oil was recently trading at $78.70 per barrel, higher by $0.65. There is still a new, long momentum read to crude oil trade that has just reversed a short trend that has been in place since 6th Nov. The 72.50 area continues to be a main price point, after sellers were held at bay recently. The 76.50 area will now act as support for tests of $80. Holding above 76.50 this week looks set to trigger more speculative long orders, and will pressure the dollar index being able to move too much higher without the dollar having a pull-back to test support. Swing Point: 78.40

Gold Bullion: Gold was recently trading up by $3.20 to $1,108.00. Gold signaled long on 3rd Nov and started to reverse that mode in early December with bouts of profit taking. The 1075 area is near-term support, backing any further long tests of 1150. Now looking for signals that support is in place. Swing Point: 1107

Written by TheLFB Trade Team, © 2007-2008 LFB Services, LLC. All rights reserved. http://www.TheLFB-Forex.com

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