The Australian, Canadian and New Zealand Dollars may see considerable selling pressure ahead as a looming downward reversal in global risk appetite weighs on high-yielding and commodity-linked currencies. Risky assets look decidedly vulnerable, with the MSCI World Stock Index trading at the highest level relative to earnings since August 2004 while the Dow Jones Industrial Average showing a well-defined Head-and-Shoulders topping formation. Where will prices head in the days ahead? Our DailyFX analysts offer their top trading ideas for CAD, AUD, and NZD.
My picks: Long USD, Short AUD, NZD, CAD Expertise: Global Macro Average Time Frame of Trades: 1 week
In the long term, Fed quantitative easing, diversification away from the US dollar and a record high budget deficit are likely to continue to weigh negatively on the US dollar. However, in the short-term, I expect higher yielding export dependent currencies to be more vulnerable going forward because economic growth driven only by government stimulus is not sustainable.
My picks: Staying Short AUD/JPY Expertise: Fundamentals Combined With Technicals Average Time Frame of Trades: 1 Day - 1 Week
As noted yesterday, I'm staying short AUD/JPY as solid resistance sits at 78.25/38 and risk aversion could remain a theme in the markets. I'm looking to the 6/23 low of 74.03 and the 50% fib of 66.84-80.46 at 73.68 as potential targets.
My picks: Stay short the AUD/USD Expertise: System Trading Average Time Frame of Trades: 2-10 weeks
I remain short the AUD/USD with stops above 8160, and I see no reason to change my stance. Currently illiquid and directionless market conditions are of some concern, but I'm standing pat for the time being.
My picks: Short NZDUSD Expertise: Global Macro, Classic Technical Analysis Average Time Frame of Trades: 1 week - 6 months
Last week, I wrote that the New Zealand Dollar was testing support at the bottom of a rising channel that has guided the pair higher since risky assets (including high-yielding currencies) began to rebound in early March. NZDUSD has now broken below the lower boundary of this channel while showing a Three Black Crows bearish reversal signal, a formidable sign of continued downside ahead. Enter short from here, initially targeting April’s swing lows at 0.5522. A stop-loss will be activated on a daily close above 0.6601, the 06/02 wick high. For complete analysis of the major currencies, please see my latest weekly technial outlook report.
My picks: Stand Aside Expertise: Technical Analysis Average Time Frame of Trades: 1-3 Days
S&P 500: We are not recommending any trades on the holiday lightened session of trade and instead will take the opportunity to broaden our scope outside of currencies to take a look at developments within the equity markets. A closer look at the daily S&P chart shows the potential formation of a head & shoulders topping pattern which looks to be in the process of carving out the right shoulder and on the verge of a break of neckline support by the 880 area. Look for a close below 880 to confirm and open the door for a more significant decline over the coming days back towards a measured move pattern objective by 800. As things have been correlating of late, any pickup in equity selling could very well translate into additional broad based USD buying on a flight to safety mentality trade.