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Forex Technical Report

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U.S. Dollar Weakens, Commodities Strengthen on Bank Analyst Comments

Mon, Jul 13 2009, 23:36 GMT
by James Hyerczyk

ForexHound.com

The U.S. Dollar started the week on the bull side of the market as its uptrend was expected to remain intact.  Trading was anticipated to be defensive.  Investors were most likely to remain risk averse while stocks and commodities continued to remain weak and the global economic picture was once again moving toward bleak.  The overnight rally highlighted the fact that traders were becoming more sensitive to the weakening equity and commodity markets and more attracted to safe-haven currencies like the Yen and the U.S. Dollar. 

This scenario changed early Monday morning when analyst Meredith Whitney upgraded her recommendation in the Goldman Sachs Group from neutral to buy and made other bullish comments regarding the banking sector. Her comments were the surprise event that equity and commodity markets were looking for given the recent downtrend and oversold status.  The subsequent short-covering rally in the stock markets and some commodity markets forced currency traders to rethink their risk adverse positions and encouraged liquidation to more acceptable sizes given the possible shift in investor sentiment from bullish Dollar to bearish Dollar.

Although it is too early to tell if this is going to lead to a change in trend in the equity or commodity markets, it is important to note that a possible short-term bottom may have been formed in these two asset classes that could trigger 50% or more retracements.

Traders should note that while Ms. Whitney’s bullish comments may have put in a short-term bottom in the equity and commodity markets, the real decision making for the future direction of these markets will be based on earnings and economic reports over the next few weeks.  Should her bullish comments gain additional support from friendly earnings and economic reports then the Dollar should get hit hard to the downside.  If her comments cannot be backed up by solidly bullish news then the Dollar is likely to redevelop its temporarily interrupted up trend.

September Treasury Bonds reversed their earlier uptrend.  Investors were supporting this market for safety reasons as the early calls were for lower equity markets.  This aversion to risky assets was making lower yielding assets more attractive.  Once the equity markets bottomed, the September Treasury Bonds topped.  Technical resistance was provided at a major 50% level at 121’02.

August Gold reversed to the upside after starting the day lower.  The reversal to the downside in the U.S. Dollar helped trigger a reversal bottom in the precious metals.  Right now it looks like the start of a short-covering rally.  If the move continues or if this market can survive a test of the recent bottom then look for the start of a sizeable retracement.

The September E-mini S&P 500 market failed to find sellers when it pierced an old bottom at 872.00.  This action coupled with the bullish endorsement of Goldman Sachs stock helped trigger a short-covering rally.  Although this may be the start of a sizeable recovery, this market will not move higher unless the economic news starts to improve.  Otherwise, this is just a set-up for another round of shorting.

In summary, the economic and earnings reports this week should dictate the near-term direction of the Dollar, equity and commodity markets. A weaker Dollar should reignite demand for higher-yielding assets.  Weak economic reports and poor earnings should help strengthen the Dollar and trigger another round of risk averse selling.

Published on  Mon, Jul 13 2009, 23:37 GMT