Return of U.S. Dollar a Possibility

Name: Adam Szatkowski Company: RJO Futures

Years Trading: 6 Favorite Movie: Blues Brothers

The U.S. Dollar (USD) has not been able to hold on the gains it made against the Euro (EUR) after the last U.S. rate cut. We did see a better-than-expected U.S. Unemployment Report, which has now raised the question of a further rate cut. As we move closer to this month’s Federal Open Markets Committee (FOMC) meeting, focus will be on the possibility of a “no change” on the current rate. With investors now seeing the U.S. economy stabilized, there is the possibility of a return of the USD. Beginning with the EUR/USD, the breakout above 1.39 in September led to a momentum rally through 1.4280. The European economy has been steady to strong, but most of the strength in the EUR/USD has come from the weakness in the U.S. As we write today, the market is at 1.4150 after breaking through 1.41. Looking at Euro Zone, there is little news that would suggest another push higher beyond the recent 1.4280 high. The European Central Bank is now expected to keep rates unchanged to help slow down the strength of its currency and its effects on the economy. With the trend turning down, look for the EUR/USD to return to the 1.39 – 1.37 range.

Moving on to the Canadian Dollar (CAD): If you follow our column, you know that we have been selling the USD/CAD on the last few breakouts and catching the momentum. These trades proved well, as the market traded through par. Taking a step back now after its run, the CAD has managed to hold onto its gains. The growth in the Canadian economy has been fueled by the strength in the commodity markets and (again) the weakness in the U.S. It could be a few months until we can see any more strength in the CAD to push it further over par. Watch for the crude oil prices (as we move into the winter months) to stay in the $80 area to keep the CAD supported. Until then, look for the USD/CAD to trade in a range in and out of 1.00.

Finally, the British Pound (GBP) has not been able to trade with the same strength as the Euro against the U.S. Dollar. Several months ago, we wrote about the next rate increase in the United Kingdom for a push into 6%. At the time of this writing, there are speculations arising that there could be a rate cut in the near future—as the housing market in the United Kingdom looks to face the same fate as the U.S. housing market. A cut in rates in the United Kingdom could lead to the GBP/USD trading back into the 2.01 – 1.98 range. As global investors began to gain confidence in the markets and move through the credit crunch, our eyes are again on the carry trade. The GBP/JPY (Japanese yen) has been quietly trending higher and should continue through, past the 240 zone. Watch for a breakout again here, for a follow-through to get into the 244 area. This month should bring many opportunities, as the market again waits to see what the FOMC will decide on Oct 30^th, setting the tone for other major banks.

The risk of loss in trading commodity futures and options can be substantial. Before trading, you should carefully consider your financial position to determine if futures trading is appropriate. When trading futures and/or options, it is possible to lose more than the full value of your account. All funds committed should be risk capital. Past performance is not necessarily indicative of future results.

About the Author

Adam Szatkowski is an RJO Futures Trading Consultant. He considers basic money management to be one of his main objectives, and is always looking at the downside of positions to preserve capital if the market is not doing what was expected. And he believes in following the trend and momentum, as well as in using stop orders to lock in profits behind winning positions.