Enter The Twilight Zone!

So a happy new year to you all! Is it me or does it seem like each year just keep getting crazier and crazier? Constant fighting, increasing natural disasters, horrible accidents, and abnormally warm weather are just some of the weird things going on and you can bet that if these things continue at the rate they’re going, it will definitely have an impact on the currency market. Not to freak you out, but you wouldn’t be too far off if you said that "We have entered the twilight zone."

But enough of my crazy jibberish. It’s time to begin the new year with a fresh mindset and a readiness to trade these currencies. I’m excited now that the holidays are over and I’m ready to take on the market once again. If you noticed your charts today, you’ll see that the dollar has once again lost some of its footing against the majors. With the US markets closed, the lack of volume has once again caused a mini-trend. Although this one wasn’t as major as the Thanksgiving Dollar Massacre (TDM), its still interesting to watch. Remember that on Thanksgiving, the thinking was that after the holiday, the markets would correct itself and that the dollar would rally back.

That wasn’t the case. In fact, after Thanksgiving, the markets pushed the dollar even lower. Will we see a repeat of this after the markets return after the New Years Holiday?

Remember how the dollar had all positive reports last Thursday and yet it couldn’t rally? Could it be that traders are already bearish on the dollar regardless of the positive data. Even with some positive news, the overall trend of the US economy is pointing towards a slowdown. What this means is that the Fed will either have to hold or cut their rates. On the other hand, across the ocean, the ECB is talking hawkish and showing good probabilities that they will be raising rates throughout 2007. So if the Fed is going to hold or cut their rates while the ECB is raising rates, you can be pretty sure that the EUR/USD is going to make some new highs.

 

Coming Up:

ISM Manufacturing Index
10:00 am ET; 15:00 GMT
Previous= 49.5; Consensus= 50.0; Forecast Range= 49.0-52.5
ISM contracted last month for the first time since April 2003 and is expected to be flat this month. Remember that this gauges manufacturing activity so anything below 50 will hurt the dollar.

Chart Analysis:

EUR/USD

I have mixed feelings about the EUR/USD right now. On the daily chart I am seeing the makings of a bearish hidden divergence. However, the stochastics hasn’t quite reached overbought yet so I think the pair can still move higher. If the pair makes it to around 3350, that would essentially cancel out the divergence. Stochastics on the 4hr chart is in overbought territory so the pair may fall in the short term. I think the Euro will drop down to 3250 and then make another push to try and break 3300. If the pair can’t break 3300 then I will look to go short. For now I’m just going to keep my eye on it.

GBP/USD

The Cable is hanging around 9730 at the moment. If it breaks 9750, there is a good chance it will go all the way back up to 9800 again. 4hr stochastics is currently overbought so the pair could fall in the short term. However, the daily stochastics is trending upwards even though it’s still stuck in the middle. I don’t see too many convincing indicators on this one so I’m just going to watch and see if it breaks 9750. If it doesn’t, then theres a good chance the pair will eventually make its way back down towards its 38% Fib line.

USD/CHF

I’m really upset my short trade wasn’t triggered last week because we’ve seen the Swissy drop very nicely. After meeting its 50 SMA and 61% Fib level on the daily chart, the Swissy fell sharply and is now resting on its 38% Fib line. The question now is whether or not the pair will continue to drop or bounce up. If you zoom in to the 4hr chart, you’ll see that the pair is resting on its 100 SMA which could provide support and cause the pair to bounce up. The 4hr stochastics is also oversold so a short term rally is a good probability. Daily stochastics is trending down and has not reached oversold yet so I think the pair still has room for another drop. Look for the pair to move towards 2175 (50 SMA) and then drop back down towards the 38% Fib line which is around 2133.

USD/JPY

Well the Yen finally dropped…..after which it proceeded to rally…..again! The Yen fell to its 50 SMA on the 4hr chart but then finished off the day by moving back up to 118.80. Daily stochastics is still in overbought territory [sarcasm ] big surprise there [/sarcasm] so like I’ve been saying over and over again, I think the Yen is going to drop. My target this time is the 100 SMA on the 4hr chart.

Conclusion:

ISM manufacturing is the report to watch for tomorrow. It’s true we have the ADP Non Farm Employment change tomorrow but I’d much rather wait until the actual NFP report comes out on Friday.