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The Euro has continued its strong run into 2008, approaching the 1.6000 level last week during some volatile trading before selling off slightly last Friday night. One of the reasons for the volatile trading is the uncertainty surrounding US Interest Rates, and the subsequent value of the US Dollar. Even though I am predominantly a technical trader, I still keep a close eye on macroeconomic reports and fundamentals, so that I am not caught off guard when a big move starts or finishes. The more information I can get, the more prepared I can be.
Interest Rates have an inverse relationship with bond prices – as interest rates go up, bond prices come down, and vice versa. If interest rates go up, we could generally expect the US Dollar to also go up in value. Therefore, to get an idea of where interest rates, and therefore the US Dollar may go, it would make sense to examine the trend of bond prices. This type of intermarket analysis can be facilitated using the Futures/FX module in ProfitSource to quickly assess the market at a single glance.
Chart 1 below shows the daily bar chart of the US T-Bond (US-Spotv in ProfitSource).
Chart 1
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As interest rates and the price of the US Dollar fell, bond prices rallied from June 2007. Chart 2 below shows the Euro (EC-Spotv in Profitsource) also made strong gains over the same nine month period on the back of a weaker US Dollar.
Chart 2
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A simple trend line which has held the price of bonds since June 2007 has recently been broken. Chart 3 below shows this setup.
Chart 3
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Trend lines are one of the simplest technical analysis tools we have, and they are often overlooked, but they can be a powerful tool if applied correctly. It is worth taking a look at a similar setup on the US Dollar / Japanese Yen (FXUSJY in ProfitSource) from earlier this year.
Chart 4
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A simple trend line was supporting the market, but once it was broken, the Dollar/Yen fell away heavily, giving a nice 1000 point move to the downside. Should the US Bond prices follow suit, we could expect to see the price of the Euro fall as the US Dollar gains strength.
Late last year as I put together my roadmap for the Euro for 2008, I was watching the middle of May for a significant turn. If bond prices head down, we could see the Euro fall back to the level of the November 2007 top as the US Dollar recovers some of its losses. If it can find support on the old top in May, we could then see it push ahead in the second half of the year.
The view of Technical Analysts has always been “My chart will show me everything I need to know”. However, we can see that by carefully integrating some economic analysis into our trading plan, we can give ourselves an edge and prepare ourselves for the big moves when they happen.
Be prepared!
Mathew Barnes
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