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Trading Opportunities Abound for Commodity Crosses

Trading Opportunities Abound for Commodity Crosses

2010-03-19 13:57:00
John Kicklighter, Chief Currency Strategist

I have been watching the commodity crosses for some time now; and now it seems we are the verge of a significant developments across the lot of them. In fact, more than a few pairs have already made their respective moves with notable breakouts (like EURNZD) and remarkable extensions (like EURCAD). However, there is perhaps more opportunity that has yet to come our way. However, before I jump in; it is important to color the fundamental backdrop. Looking ahead to next week, there is limited scheduled event risk; but then again, the larger shifts in sentiment-based trends is where I see volatility and direction developing. Should the troubles with Greece, the application of financial breaks in China or some other unforeseen event sour the steady advance in capital markets; the subsequent collapse for these more speculative-senstive markets could leverage a dramatic response from the currency market. That being the case, the Aussie, kiwi and Canadian dollars could easily find themselves overextended.

For my positioning, I am looking to play on the probability of a risk reversal as well as looking to isolate a pair that somewhat reduces its exposure to the whiles in unpredictable risk trends. My only current, existing position is the short USDCAD position that I have held since it broke 1.02. The follow through to parity has been slow to come; so moving my stop to breakeven seems a reasonable step. Looking to take advantage of a possible reversal in risk appetite, both AUDUSD and CADJPY look particularly well suited for reversals. For AUDUSD, we have a very consistent rising wedge formation that pushed price action into a short-form descending trend. Already predisposed to believe the build in risk premium has been overdone, I have a clear technical setup for a break and reversal with the break of the rising trend that marks the bottom of the wedge (at around 0.9190). For CADJPY, the pair is just coming to resistance in a broad wedge pattern (between 90.25 and 80); and the Canadian currency itself is looking significantly overbought across the market. An entry around 90 should maintain a wide stop (more than 100 points) and position size that reduces the overall notional risk. Finally, in an effort to offset some of the risk factor in my setup, the AUDCAD pair balances a significant portion of the yield influence. With a blatant wedge formation coming to its apex, a breakout it almost certainl. It could go either way; but the greater opportunity from a sheer historical range perspective is for a break below 0.9350/300. That would be my signal for entry.

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