Breaking Down the Commodity Currencies

Friday, May 18, 2012

Good Morning,

As always, fundamentals first. So far today, not much economic data and definitely a quieter technical start as well. To get it out of the way, let's look ahead to next week's data: unemployment claims. Unless there are international surprises, it is a very, very quiet week data wise and remember, it is the week before Memorial Day. So unless there is some volatility (hard to imagine there won't be some), Friday's trade and the next Tuesday's trade could be light. I say could, because if there is opportunity due to volatility, traders will be at their posts.

Technically, I would like to review two "commodity currencies" starting yesterday's AUD/USD chart. It provided some good "inter-market relationship" trading opportunities.

Past performance is not indicative of future results

You can see it was range bound and like most other currency pairs, the AUD found strong support at the lows of the day (multiple times). Finally, near the end of the US equity trading session, the stock market broke through its low of the day and closed much lower than it had been when it previously bounced intraday. At that point, the USD finally pushed through its highs of the day, sending the AUD lower and then even lower in overnight trading during the Asian trading session. Interestingly enough, we are right back at that
"breakdown level" Could old support be new resistance in the .9876 area?

Looking at our second "commodity currency", the USD/CAD, we can see that the USD has firmly broken out above its previous range. This correlates with oil prices dropping from 105 to 91. 

Past performance is not indicative of future results

If you think oil prices are fairly valued, you could buy oil or, in essence, buy the CAD against the USD. If we get any more news out of China and other emerging economies that are supporting commodities, oil and other commodities surely could fall more.

Remember, the question traders are asking is: given the analysis I am conducting right now, do I feel this currency, this stock, this option, this future, etc... is fairly valued or overvalued. If so, I create a trading plan and manage the trade from beginning to end with the appropriate stop and target prices.

Happy Trading and Be Environmentally Cool

Coach Brian

Forex trading is one of the riskiest forms of investment available in the financial markets and suitable for sophisticated individuals and institutions. The possibility exists that you could sustain a substantial loss of funds and therefore you should not invest money that you cannot afford to lose.

Posted By: 

Brian Kahn

Brian provides regular commentary focusing on the relationships between various financial markets. An experienced trader and portfolio manager with over 15 years in the markets, Brian relies on fundamental and technical analysis to create trading plans for each and every market entry.