It is a record breaking day in the financial markets and the action is not in US stocks, which have been bouncing between positive and negative territory all morning but in the currency and commodity markets. If you havent realized it, the US dollar has plummeted to a record low against the Euro and a 30 year low against the Canadian dollar. The trade weighted Dollar Index is hovering right above 78.19, its lifetime lows set back in 1992. Gold prices also hit 28 year highs above $730 an ounce and even though oil prices are softer this morning, the front month October contract on the NYMEX hit a high of $82.15. Gold at $800 an ounce and oil at $100 a barrel has now become an increasingly likely possibility.
Is it a coincidence that the US dollar, oil and gold are all breaking significant levels at the same time? No.
This is one of those cases where we should ask the question What Came First, the Chicken or the Egg. It can be said that the weakness of the US dollar has driven both gold and oil prices higher but at the same time, the rally in oil prices has played a major role in pushing USD/CAD towards parity (1.0) and raising concerns aboutUS consumer spending in the months ahead. The weakness in the US dollar reflects the potential for further problems in the US economy as well as the impact of interest rate cuts on the US dollar. The reason why the dollar can be blamed for the strength of oil and gold is because a weak dollar induces inflationary pressures and since oil is priced in dollars, OPEC nations have a vested interest in seeing oil prices rise just so that they do not see a significant shortfall in profits. As you can see, the financial markets are very interrelated and movement in one market will certainly lead to movements in others. In fact, the following charts illustrate how the EUR/USD, Gold and Oil prices have moved in lockstep since the inception of the Euro.
Trading Opportunities Going Forward
So now that the records have been made or key levels have been broken, its time to consider the more important question which is Whats Next?
EUR/USD: The Euro has proven to be one of the top trades of the past 7 years, as it has set fresh record-heights on pronounced US dollar weakness. The currencys break above the critical 1.4000 mark leaves scope for a continued advance, as the greenback likewise shows few signs of slowing its recent trend. Given the Euros resilience, we may be witnessing the beginnings of a decoupling from US and European economic growth. Markets clearly show expectations that Europe will be able to withstand a reversal in recent US growth trends. Yet the Euros advance against other major currencies implies that speculators do not fear a pronounced recession for the worlds largest economy. Technically, the EUR/USD is in a strong uptrend, but the rally above 1.4065 completes the wave 5 that began at 1.3828 according to our Technical Analyst Jamie Saettele. Therefore a risk of a reversal increases with every tick higher but, as always, we will wait for a 5 wave decline and 3 wave setback before turning bearish. Follow the Discussion on the currency pairs outlook in the EUR/USD and Elliott Wave Forum.
USD/CAD: The Canadian dollar has also set fresh multi-decade heights in dollar terms, with the currency hitting parity with the greenback this morning. Clearly, US dollar weakness has played a very large part in the Loonies advance. Yet the Canadian dollar has likewise benefited from oil prices at record-highs and buoyant demand for mergers and acquisitions of Canadian corporations. This leads the Loonie as the perfect anti-dollar trade, with overall momentum to send the currency beyond $1.00 through the short term. Technically, a drop below 1.0004 completes 5 waves down from 1.0173, which would potentially lead to a larger corrective rally back to 1.0175 (former resistance) before a drop to yet a new low that would possibly complete the entire decline from 1.1825.
AUD/USD: As one of the worlds largest gold producers, the Australian dollar has benefited significantly from the rise in gold prices. The yellow metal has surged above $730 an ounce on heightened fears of inflation, unease in the US dollar and concerns about US growth. Typically, investors will buy gold to offset dollar weakness and/or as an inflation hedge. If the dollar continues to fall, gold prices should continue to rise and $800 gold could take the Australian dollar up to 89 cents. Technically, the objective for gold is $855 and even though we do expect a pullback in both gold prices and the Australian dollar before a further move higher, gold should stay above $700 an ounce.
By Kathy Lien and David Rodriguez of DailyFX.com