Trade Team Update

After a wild late-Asia session this morning, it appears the markets have taken a bit of a breather today...

For now crude and gold have stabilised while the euro has formed some "temporary" support at the 1.4860 level... but we'll cover this in a bit.

Today's big data printed better than expected as we forecasted but the reaction was muted at best. I think the weak reaction was for the exact reason we discussed last night...

We know the dollar was very weak in June which obviously correlates to a higher demand for U.S. exports. While on the surface this looks like really good news for the USD, it's really not and the data won't put any further pressure on the euro.

With the dollar becoming an "overnight success story" it doesn't take a brain surgeon to figure out the strong Trade Balance data we saw today won't be sustainable when August's data prints in October. The same should be true with the Current Account, and both of these reports are extremely correlated to the overall strength or weakness of the dollar.

Tomorrow:

Tomorrow's fundamentals are extremely important for the USD. Before we get dollar data we get an important relase out of Europe -- Eurozone Industrial Production. In the past this piece of data wasn't very closely watched by now that the Eurozone's growth fundamentals are on notice, this type of data will face more scrutiny.

My forecast is a print of 0.1% or lower. I do not believe the data will print as weak as last month's but I cannot forecast a print at or better than expected. I'm not expecting too much of a reaction on this data as there will be much bigger fish to fry later on...

U.S. Retail Sales take center stage tomorrow. Last month both the core and non-core printed strong to the upside, for very good reason of course. Americans were spending their free cash from Uncle Sam and gas prices were at all-time highs. Those were the two biggest contributing factors to the USD+ data.

Now comes the true test of the consumer... the U.S. consumer makes up approximately 65% to 70% of GDP. As you'll recall we got strong GDP data last go around. If tomorrow's retail data prints to the downside, which I'm expecting it to, guess what the market will be thinking about GDP? They won't be happy thoughts, that's for sure.

Based on my own research with data from top retailers like Wal-Mart, Target, etc., I find it terribly difficult to maintain a USD+ bias for tomorrow's retail data. And I believe should the data print weaker than expected this is going to make the market stop and think about their bullishness on the USD.

Weak retail data will mean downside revisions to GDP and this will put the dollar back under pressure. If this scenario plays out tomorrow as I'm forecasting the only thing that could screw it up is weak EUR data and more sell-offs in commodities.

Commodities:

I think crude and gold could be nearing a crossroads. Bear in mind I'm not a commodities trader, but I believe the more they sell-off the closer they get to finding a bottom and finding support and then attempting to make a move back up.

If weak USD data the rest of this week confirms, I believe buyers will emerge to buy up gold and crude. And this is a real key for the euro's survival.

Last night's I was seeing central bank selling of gold within gold's price action and this was the likely catalyst of gold's sharp sell-off, which of course was further fueled by the appreciating dollar.

Sure enough... today the ECB reported making large gold sales. I had no idea this particular report was be released today, but that sharp sell-off stank of central bank operations. The ECB's done selling for now in my opinion.

We also got another report on crude today that showed demand has dropped to it's lowest levels in 26 years in the U.S. Well, no wonder crude topped out and has sold off... the old supply and demand principles still hold true in the futures market.

It will be very important to watch how commodities react to tomorrow's USD data. Should the data print below expected, the euro may get a nice boost if commodities work hand-in-hand to hammer the dollar.

EUR/USD:

Today was the first day I've actually seen visible evidence within the price action that some of the big boys were buying the euro. Buyers stopped the run to 1.4800 dead in its tracks and buyers have kept the euro fairly supported throughout the day.

Now this won't continue if we get EUR- and USD+ positive news tomorrow, but at least the euro is showing some signs of life and the market is showing some signs of getting over their sudden love affair with the dollar.

Based on what I saw in the price action I'm not going to be adding a new shorts and will be looking to add small euro long positions until the fundamentals, price action, and market correlated variables tell me otherwise.

Am I still bearish on the euro? Absolutely. I will short the more extended rises, but price action has shown me that the momentum to continue this strong slide down is pulling back.

I still believe we can work our way back to the 1.5300 level in the near-term as long as some of the factors working against the euro start working against the dollar.

I'm not ruling out another run to the 1.4800 level, especially if the euro data prints weak this morning, but should we make this move, I'll be watching the price action closely for signs of buying and may likely buy down there.

As I've mentioned many times, the only way I'm going to buy the euro is first when the price action shows me the strong downside momentum is disappearing and for the market to begin showing an appetite to buy the euro again.

The bottomline is, fundamentally, the landscape has not changed in the U.S. Sure, there's been signs of life here and there, but the credit crunch is still crunching, financial markets are extremely unstable, the jobs and housing sectors are a mess with no end in sight, and the I believe the consumer is still in pull-back mode.

That's about it for now... be smart with your trades and do not overleverage. Be careful taking new shorts down here...