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The Dow Tumbles and Dollar Rallies, All is Right in the World Once Again

The Dow Tumbles and Dollar Rallies, All is Right in the World Once Again

2010-07-16 18:49:00
John Kicklighter, Chief Currency Strategist

The options are endless for potential trade setups heading into the end of the week. In fact, a number of those pairs that I have been watching for the past week have actually jumped into action. The problem is that many of these moves are based on very volatile levels of investor sentiment and they have taken place just before the weekend. It is a risky position just to jump in late on a move and hope that momentum will pick back up after the weekend (or reverse if you are attempting to catch a reversal). It is important to play these developments with caution. As for the drive behind this sharp swing in sentiment, it is safe to say that the preceding build up was overdone and a correction was inevitable. A specific catalyst though can be assigned to the questionable performance of today's top 2Q earnings figures and the poor performance of key US data. It is difficult to tell whether this a correction for a burgeoning bull trend or the resumption of a larger bear trend. The weekend is not the time to make this assessment and place trades on it.

For my active setups at this point, my short AUDCHF is moving onto its second day of declines and is struggling to keep up momentum into the close. Surprisingly, there seems to be little or no safe haven appeal in the franc when it comes to GBPCHF. The pair has pulled back from my entry and the potential for a reversal has diminished significantly. I will see how things develop early next week to see whether I should simply cut out or hold with it. With the BoE minutes, public debt figures and the 2Q GDP release all due, the sterling could be looking at a very volatile ride. Then there is my long USDJPY position. We have broke 87; but I will hold. Position size is important with this one as it allows me to tolerate a much wider stop. That also means less profit should it turn my way; but I am looking at this for the longer term.

As for the potential trades I will be looking at first thing next week, there are two categories: those that are active immediately and those I'm still waiting on to make their move. Amongst the active, CHFJPY tops the list. Finally breaking 83, this pair has put in for a clear reversal effort after developing a near two-month rising trend channel. I'll look for a retest of former support and the necessary fundamental support to offer me entry. Being exceptionally cautious of the pound given its forthcoming event risk, the EURGBP break above 0.8425/00 is leaving me with a wait-and-see approach. EURCAD is another pair to make a fast break above a triple top resistance at 1.3425. I'll look for the same retracement; but I'll be exceptionally careful with the euro given the EU stress test results coming out next Friday.

Now on to the potential trades that are still one step away from active. Another euro-based pair, EURAUD is facing a long-term descending trendline around 1.49/50 that could facilitate a slow reversal that has developed over the past three months. The other opportunities on my radar are highly sensitive to risk appetite trends. CADJPY has pulled back to 82 and is testing horizontal support and a long-term rising trendline (and a nice head-and-shoulders neckline). AUDCAD has risen back to a major bearish break level at 0.92; but I need confirmation that this will hold as resistance. AUDNZD was tempting my long awaited break below 1.2150; but has since reversed sharply to head back into congestion.

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