Record High Euro vs Us Dollars only a week ago - Read that again!

Foreign Currency Exchange Outlook : Today we get, in addition to the usual unemployment claims, existing home sales. We already know it will be bad and that is priced in, right? Just as traders are starting to feel that pessimism was overdone about the US financial system and the high price of oil, maybe housing will come back to bite us on the rear end. After all, the housing and mortgage data is pretty bad. The first rumblings of rate hike talk could be just smoke. Realistically, the US Fed can’t hike rates until the housing bottom is in. How will we know the bottom is in? Well, it’s not in as long as delinquencies and foreclosures are still rising. The housing bubble hasn't finished bursting and we might consider it the “first cause” of the current problems from which all else flows.

It’s interesting that the Foreign Exchange Market spends almost no time on the housing crisis. It has mostly priced it in and moved on. It’s conventional wisdom that the stock market “leads” the economy but we wonder if it might be the US Dollar, instead. If so, then “moving on” may have been premature and the US dollar is due for an unhappy shock.

Existing home sales (due at 10 am ET) are forecast to fall by 1% to an annual rate of 4.940 million units in June, down from a rate of 4.990 million units in May. May was an oddball piece of data, the second rise in a 10-month slide. The number of unsold homes remains near all-time highs. The Office of Federal Housing Enterprise reported earlier this week that home prices fell by a record 4.8% y/y in May, with some analysts still forecasting another 15-25% to go. Will the Fannie/Freddie rescue change that? Probably not, although it may help marginally, with some 400,000 distressed homeowners targeted in the bill. But Foreign Exchange Traders are prone to take the attitude “don’t bother me with the facts.”

It’s nice and may suffice that oil is falling, the Fannie/Freddie bill gets passed, financial stocks are okay, and US yields are rising. On the technical analysis side, the US Dollar has recovered more than 50% of the move from the May-July euro move up to the record high only a week ago.

Read that again—we had the record high Euro vs Us Dollars only a week ago.

This is an exceptionally speedy correction and we have to be careful to keep calling it a correction until we feel more confident it’s a true trend reversal. It’s not a reversal until additional conditions are met, including a lower low than the last intermediate low (1.5612) and before that, 1.5303.

The euro has to go all the way past the May low of 1.5284 to call it a trend reversal.

From a trader’s perspective, this is silly. We wouldnt want to lose the opportunity to make gains on another 400 points. But in the Big Picture, for position traders, it’s the only conservative way to look at it. If Foreign Exchange Traders fall out of love with the US Dollar —and they are fickle—because oil zooms up or some other reason, watch out.

We always get a correction after a new historic high and they can end very fast.

Bye For Now

Barbara Rockefeller