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Commodity Crosses Prepped for Breakouts, Trends

Commodity Crosses Prepped for Breakouts, Trends

2010-03-26 14:55:00
John Kicklighter, Chief Currency Strategist

We are seeing unusual conditions in the currency market. The US dollar is starting to retrace some of its gains as the EU/Greece debacle smooths over and fundamental traders strain to define an immediate source of bullishness to keep the dollar moving higher. With this selling pressure on the greenback and a rise in the capital markets, it would seem that all signs are pointing to a clear bearing on risk appetite. However, the commodity currencies (which typically have a direct, positive correlation to investor sentiment) are actually falling on the day. This is an unusual situation that should clue us in to the atypical circumstances we are dealing with. For me, this is a sign that sentiment trends are actually little changed and instead we are seeing sidelined capital being channeled back into the speculative markets. How long can these flows last? Well, this same scenario of capital reinvestment with tepid expectations for returns played out through the whole of 2009; so their is significan potential. On the other hand, this time around we are not recovering from severely depressed levels; and traders are more sensitive to reasonable forecasts.Therefore, a true shift in risk appetite (most influentially a collapse) could put the markets back on track.

Trying to trade against market irrationality or specific conditions that do not seem to make much sense is a losing game. Armed with reasonable fundamental expectations, I must still yield to how the market evolves. For my trading that means I must remain flexible on those positions that seem well-founded. For my EURUSD short, the follow through on long-term Euro Zone concerns and US capital unwinding may retrace and stall the initial break; so I will keep my stop close above 1.3445. The same holds true with the AUDUSD short that is benifiting from today's unusual mix. Here, I have actually moved my stop up to just above yesterday's high (leaving me with modest profit should this pair be stopped out). As fro pending positions in the comm bloc, I'm also interest in what is going on with NZDUSD. Technically, a short-term head-and-shoulders pattern sets a clear resistance at 0.70. Pushing this floor would be a clear entry; but maintaining the position for more than 50-100 points will have to be a funciton of whether a risk aversion trend develops. Finally, I am also keeping an eye on AUDCAD. The long-term wedge pattern is quickly coming to a termination point; and a breakout has a high probability of establishing a trend. For fundamental influence, this pair isn't so much risk appetite as it is relative interest rate forecasting. And, considering the outlook for the loonie has just recently started to develop into a hawkish path, the technical and fundamental potential favor a bearish resolution.

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