Strategy Reports

Weekly opportunities - Nov. 29, 2010 to Dec. 2nd, 2010

Pair of the Week: EUR/USD
The euro has been beaten down badly since hitting a 10-month high on Nov. 4. The bailout of Ireland and growing risk of contagion has pushed the pair down by more than 1100 pips. The Irish issue now appears to be settled and Portugal is on a better fiscal footing. The euro is now oversold but it’s a critical week. If sentiment stabilizes, the euro will take back some of its losses. If the situation continues to deteriorate, there is no telling when the slump in EUR/USD will end.

Pair to Focus On: GBP/CAD
These two countries sit on the periphery of Europe and the United States and benefit greatly when the economies of their neighbours are prospering. The week ahead features key data points on the underlying strength of Europe and the United States but the EUR and USD may ignore the data because of political and fiscal worries. The trade in GBP/CAD will give a clearer picture and is the basis for a lasting trend. Also note that technically the pair is very close to some critical support levels.

Tip of the day: Use Momentum Indicators
Markets tend to move in trends for substantial periods of time and it’s usually best to trade in the direction of that momentum. But even the strongest trends aren’t straight lines. There are dips and retracements and every traders knows how frustrating those moves can be. Momentum indicators are technical tools that use different mathematical formulas to determine if a market has moved too far, too fast. If a currency has surged for 10 straight days or 10 straight hours, market participants become more likely to take profits and that will cause a minor reversal. Momentum indicators aren’t perfectly reliable but they are a very good way to know how close to maturity a short-term trend may be. One excellent momentum indicator that’s easy to use is the Relative Strength Index, or RSI. It uses a 1-to-100 scale to measure the speed of a rise or fall. If it is above 70, a market is overbought; if it is below 30, it’s oversold. Try to incorporate a momentum indicator into your trading.

Quote of the Week: “The Political Option”
The bond vigilantes circled Ireland and then pounced, forcing the nation to call to the EU and IMF for a bailout package that has enraged the Irish public. In a by-election following the announcement the ruling Fianna Fail party was badly beaten in a once rock-solid region of support. With a general election expected to be called for January or sooner, it’s likely that the party will be decimated. With the bond market now punishing Portugal, the leaders there are scared. “There are those who think that the best way to preserve the stability of the euro is to push and force the countries that at this moment have been more under the floodlight to that aid,” said Portuguese finance minister Fernando Teixeira. “But that is not the vision or the political option of the countries that are involved.” If Portuguese leaders do everything they can to avoid a bailout, the crisis will grow and could spread to Spain, whose economy is twice the size of Ireland, Greece and Portugal combined. A crisis there would be disastrous for the euro.

What You Missed Out On: EUR/CAD
The euro has fallen 300 pips against the Canadian dollar in the past week and more than 650 pips in the past 10 days. The euro has fallen sharply against every major currency as debt problems threaten to force a bailout of Portugal.