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New Trends Fail to Gain Traction at the Week's Open

New Trends Fail to Gain Traction at the Week's Open

2010-03-15 14:23:00
John Kicklighter, Chief Currency Strategist
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The way the market closed this past Friday; it seemed as if the dollar could be on pace for a meaningful reversal. However, looking for supporting clues of such a significant shift from other currencies and asset classes; it seemed more likely that the run on the dollar was an isolated event. And, if a currency that is so closely associated to risk trends as the US currency is diverges from the underlying current; the probability that an asset conforms to sentiment is far greater than the alternative. We can already see that playing out this morning with EURUSD retracing its push above 1.37 and GBPUSD pulling back from 1.52. Looking across the other asset classes, we see equities are still cutting directionless congestion patterns, commodities are easing off their recent highs and bond yeilds are little changed. All told, this suggests the dollar's move at the end of last week was an aberration; and we are still waiting for that much-anticipated return to trend for the speculative markets.

For positions, I still hold positions that are hold out both long and short exposure to the US dollar. However, both of these positions are the subject of fundamentals than just surface demand for risk appetite. My long USDJPY holding is developed around considerations of growth, interest rate and fiscal stability differentials. A comparison between the two shows a veritable checklist for dollar appreciation over the long run, while the yen retraces from highs that were fully establish through risk trends alone. On the other side of the coin, a USDCAD short finds two economies that are inextricably linked. The economic connections between the two are so substantial that more volatile market dynamics are avoided. With this pair, I am looking for a short-term follow through on the break of 1.02. If this pair closes back above this former support; the meaning of the initial break will have passed and I will cut the position. Another position that I am carrying over is the short EURGBP setup. The pair rallied to test my entry at 0.9120 this morning; but a hold just north of this level seems to put a triple top in to further support a descending trendline. Finally, I have taken an interest in EURJPY. A reduced-size speculative short at 124.75 can maintain a stop of 100 points (low notional risk given the position size) and easily set a first target at 175 points.

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