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Early Breakouts amongst the Commodity Bloc May Precede Larger Moves

Early Breakouts amongst the Commodity Bloc May Precede Larger Moves

2010-03-12 15:18:00
John Kicklighter, Chief Currency Strategist
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Activity in the currency markets has tappered off over the past week; though there has been a consistent, risk-favorable bias along the way. This divergence between a steady trend and a clear lack of fundamental support is concerning in my book. Taking an objective measure of the US dollar (my benchmark for the broader currency); we see that activity levels are near the lowest seen since August of 2008. This pairs well with the congestion on EURUSD. In the meantime, the economic and sentiment backdrop has deteriorated; leaving us with questionable stability. Ultimately, I believe we are heading for a remarkable breakout - one in which there is a good opportunity for follow through for risk trends themselves (meaning a potential trend for all of the various asset classes that have a clear link to growth and returns). For the the commodity currencies, the connection shouldn't be hard to make. At the top of the risk curve (either deservedly or by association), the instruments hold a clear attachment to the rise and fall in yield appetite.

For positons though, I am not looking to those pairs that are the most reactive to changes in optimism - at least not yet. Right now, my interest lie with the those pairs that have a greater fundamental ambiguity. For example, my only active position is a short USDCAD position from 1.0185. Triggered on the tentative break of a triple bottom (in a wedge formation) at 1.02, the backdrop from this pair is complicated by the close ties in economic activity and monetary policy between the US and Canada. This is certainly a non-traditional pair; and my interests are more technical than fundamental. While the interest rate outlook and growth potential do look better for Canada right now, this pair is already pushing to historically low levels. Nonetheless, the pull of parity is no doubt strong. Therefore, on a reduced size position (I have to account for the fact that the dollar is still placid with most other pairs), I have placed a stop at 1.0240 and set a first target at parity. This should make remarkable progress either today or Monday; otherwise, I will lose conviction and bail. Set with greater potential; I am preparing for a breakout in underlying sentiment trends. For this volatility, both AUDUSD and AUDCAD seem good candidates. For the AUDUSD, my interest would be in a bearish reversal that would require a move towards risk aversion. An entry would be a break of the rising trend channel of the past two weeks and a stop would be placed above the previous day's high. AUDCAD is another mixed bag because the speculation of pure potential behind the pair is swinging back in the Candadian dollar's favor. In a terminal wedge pattern (going back six months), a break of the rising trend floor (9/2 to 12/23 to 2/5 to 3/5) will encourage an initial entry and a drop below 0.92 the development of a full short position. I'll keep my eye on these setups and further develop my strategy as things happen and I can discern the market conditions.

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