USD/CAD Breaks Resistance Line

08/23/2010 11:27 am EST

Focus: FOREX

USD/CAD has taken out resistance at a falling trend line established from the swing high in mid-May following a rebound from horizontal support at 1.0294. We will enter long from here, initially targeting 1.0713. A stop loss will be activated on a daily close below 1.0393.

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Overall, the dollar stood up surprisingly well this past week because pessimism remained an indelible part of the speculative crowd’s psyche. Given the aggressive correction in favor of the greenback in the trading week through the 13th and lack of viable event risk in this most recent week, a correction was to be expected. However, the resulting pullback was far smaller than would have been expected. In fact, the dollar would mark a few tentative, but critical breakouts with a few very important pairs (EUR/USD, GBP/USD and AUD/USD). However, where the dollar would test multi-week highs, it did not fully follow through with a true breakout. As we move forward to a new trading week, we have all the necessary elements to revive the single currency’s August revival. Yet, further progress for many pairs would move the dollar beyond the realm of correction and into a true trend. Such a development would carry significant weight, so the catalyst required to jumpstart such a move may need to hit a critical vein.

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Pound for pound, the most influential and consistent fundamental driver for the dollar is investor sentiment (the dollar’s liquidity is difficult to dispute even if traders want to argue the fundamentals of the greenback’s safe-haven appeal). On that front, we have seen the more sensitive and less complex speculative asset classes come to the verge of continuation on burgeoning bear trends. In all likelihood, pessimism will feed itself; but there are more than enough scheduled threats to push things along. One of the most concentrated factors in the coming week is the fear that the global economy will stall in the second half of the year. If that indeed is to be the case, we will surely see early signs of it in the range of GDP revisions due for Germany, the UK, and the US. Why are revisions so important? Because they are perfectly positioned to disappoint. The German reading will be particularly influential as the initial reading was a record high, and therefore, a holdout for those still hoping for a bullish outcome. If the details to this report undermine expectations for the future health of the economy, a highly unstable region could be facing a true financial crisis.

The US GDP reading itself represents a major fundamental driver for the dollar. Certainly, the performance of the economy is essential to the assessment of relative strength, but the outlook for the global economy is generally pointing lower. Therefore, the real impact through this data will be the general impression investors will be left with after the release. There is speculation that the revision could pull the reading to a sub-one-percent level. If that is the case, the hope for returns and yield will dissipate quickly, thereby making the dollar more valuable as a safe haven. On a side note, this data is scheduled for release on a Friday, so its impact could be limited by liquidity.

As we wait for risk trends and the US GDP data to take control, there are a number of top-tier indicators to keep track of. Watch the Chicago Fed National Activity index, durable goods, and existing and new home sales figures for potential volatility boosters.

By Ilya Spivak and John Kicklighter of

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