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Tuesday, December 16, 2008

Euro Rally Nears September Low, Which is Potential Resistance

Written by Jamie Saettele, Senior Currency Strategist

-1.3877 Should Provide Resistance
-USDJPY Risk for Bears Can be Moved to 92
-NZDUSD Rally Accelerates, AUDUSD Next?

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The EURUSD broke above trendline resistance drawn off of the July and September highs. The pair is closing in on former resistance from October at 1.3789 and former support from the September 11 low is at 1.3877. I wrote yesterday that “staying above 1.3247 keeps the short term trend up but beware that a top of at least a few days likely forms in the 1.3631-1.3877 zone.” A corrective decline could be sharp, given the thin market conditions that are present at year-end. A move back to at least 1.3250-1.34 is probable once a correction begins.

Dollar Extends Losses; Currency Pairs Close in on Targets

The US dollar plunged across the board today and various pairs have reached or are very close to reaching important levels. In particular, the euro / dollar is nearing completion of a 3 wave rally from the October low (in what will probably be the first of 2 such rallies). Resistance should be strong at 1.43.

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After today’s surge in the EURUSD, the pair is probably nearing completion of the first of several 3 wave advances that will carry price close to 1.50 over the next several months. A brief history lesson is in order after today’s rally. Since the introduction of the euro, the EURUSD had never rallied more than 5% in one week (most was 4.84% in December 2000). This has changed as the EURUSD rallied just over 5% last week and has rallied exactly 5% to this point already this week. Price spiked through 1.41 today and through the 50% of the drop from 1.6040 in the process. The next level of potential resistance is weekly pivot R3 at 1.4313. Needless to say, this rally is extended and today's nearly 3% gain is one of the largest % gains in the EURUSD's history. Similar advances (in % terms) have resulted in at least multi-week tops within 1 to 2 days. In summary, expect resistance at 1.43.

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No change from this morning: It is still possible that last Friday’s spike down to 88.10 provides more significant support but it is best to stick with the strategy I have employed over the past number of months. That is, keep moving the stop down as price decreases because longer term charts argue for a drop below 80 in order to complete a long term 5 wave drop that began in the 1970s. “In viewing the rally from 88.10, I am more inclined to stay bearish. The rally is not clearly impulsive (which would mark a probable trend change), so there is little reason to flip from bearish to bullish. In fact, the rally counts best as a double zigzag correction.” Move risk to 92.

Fed Cuts Rates by 75bps to a New Record Low

The U.S. Federal Reserve decided on Tuesday to lower its Fed Funds rate by 75 basis points to 0.25 percent, the lowest level for the overnight rate ever. In particular, the Fed is concerned about the deterioration in the labor market, tight credit conditions and the ongoing contraction in the housing market which is likely to weigh on economic growth over the next few quarters. More importantly, the Fed anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time, according to the Federal Open Market Committee (FOMC) statement released today.

Forex Market size and liquidity

The foreign exchange market is unique because of the following characteristics:

* the high trading volumes
* the extreme liquidity of the market
* large number of traders in the market
* large variety of traders
* geographical dispersion
* long trading hours: 24 hours a day (except on weekends)
* the many factors that affect exchange rates
* the low margins of profit
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