It is quite interesting how with the outflow of negative news like this, the stock markets reacted by rallying and the bulls got behind higher yielding currencies like the EUR, GBP and AUD.
The Dow closed over 200 pts up, the S&P 500 higher by 2.69 %.
EUR, GBP and AUD surged to close up 1.06%, 1.34% and a whopping 3.7% respectively on optimism related to the stimulus package to be announced next week by Obama's administration.
AUD was greatly helped by the increase in prices of base metals like copper.
Well, a guru once said 'the markets can stay irrational longer than you can stay solvent'. I think to trade in these markets, one have to go with the trend (however short) more than trading on economic data and long investment horizons.
Taking a closer look on the EURUSD though, I think this optimism is premature and would encourage traders to sell on strength (up to 1.33 - strong resistance level seen in late Jan 09).
Looking at the EURUSD chart, the pair is still trading in a downward channel which stretched as far back as mid Dec 09. I think EURUSD has potential to head further south in the weeks ahead.
To me, the EUR is not a safe currency to go long in until because there will be more ugly news coming out of Euroland :
- The market sees that the ECB is behind the curve in cutting rates and lowering refinancing costs
- Fragmented policy making in the 16-nation group jeopardise coordinated (effective) efforts to boost growth
- Eastern European countries are running very high finance deficits and will prove to be a drag on the currency
- Credit downgrades for Spain, Greece, Ireland and maybe more to come (making financing more expensive)
I've also observed this week has been a case of selling out of the EUR and buying into GBP. I don't really think the GBP is a much better option but the lack of really bad news from the UK helped?!
Besides, in a technical move, the market seems to be trying to push the EURGBP to settle below 0.88. Last quoted price from Friday 6 Feb was 0.8753. This looks to me like the completion of a double top reversal pattern in the making.
MACD falling into negative territory also points to good momentum for the pair to fall further. Notice the short dated MACD line moving further away from the long dated line. The lower highs also point out that the bulls have lost a grip on the pair.
My call: sell into strengths up to 0.91 and take profit at 0.86 (nov-dec 08 congestion period).
I don't expect the pair to move down so strongly because the market would get spooked by bad news coming out of the UK eventually. I see another congestion coming.
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