GalleonFX - 07/27/07 Crazy markets and details on recent draw down

If you have been both watching the new and or currency markets you will know that things have been pretty crazy lately with the USD Index reaching new lows with the EUR/USD and other currency pairs also set records highs.

The pull EUR back from the recent highs has not worked in our favor in the latter part and end of this week.

Now to get really technical and with some detailed explanations of what is going on with our specific trading systems and how it is reacting to these market conditions as we recap this week.

Our system has assumed a EURUSD bias around 1.3730 area with several positions, for it had determined a continued EURUSD trend was still present and that the market had broken through a significant resistance area (1.3650) for reaching new five year highs.

This bias was favorable for us when the EURUSD market reached the 1.3840 area from July 11 to July 24, but on July 25 it tumbled down 100 points,and on July 27 (Friday), it tumbled again another 100 points to retest strong support at previous resistance (1.3650 above).

At this posting about 5pm EST Friday July 27th, we are currently at -13% intramonth draw down because of this market fall (or USD correction). We have had a couple long counter-trend USDCHF in play to catch the USD correction but interestingly enough, this contrary market has moved up only 0.5 (or half) as far as the EURUSD has fallen (when traditionally the inverse ratio is 1.1 in terms of number of pips), and thus not as much hedging has occurred as we would like. We believe this lack of movement on the part of the USDCHF is because few are willing to take on the risk of buying long on a currency pair that has been in a strong downward trend for the last 6 months.

A few of our EURUSD positions have been stopped out on the way down but a handful still remain in play, anticipating that the overall trend is still in favor of EURUSD and that the sudden fall we have seen is a retest of 1.3650 strong support. The month is not over and we expect that by the endof the month the EURUSD will have climbed up to at least the 1.3730 area, which will end us at -5% for the month. If the market retraces back up to 1.3800 area then we will be at break even or positive for the month once again.

Keep in mind that our long term view on the USD is still bearish and as it continues to fall the EURUSD could easily break 1.40 over the next few months. Our systems are correct in jumping on this trend but that does not mean the road will not be rocky before the EURUSD hits new highs again. Hang in there as we ride this out. I believe the worse of the current draw down is over since the USD is fundamentally in trouble and long EUR positions will eventually win out. And long EURUSD is still the direction we're hedged in.

If we have more details to report before the end of the month we'll do so. Other than that look for more news after the month end.