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Technical Setups Point to Possibility for a Siginificatn Dollar Reversal

Technical Setups Point to Possibility for a Siginificatn Dollar Reversal

2011-02-05 03:44:00
John Kicklighter, Chief Currency Strategist
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Taking a full assessment of the positioning of the more liquid currency pairs and the fundamentals that face us over the coming week and beyond; there seems a good chance that we could have some significant moves ahead. We can break things down into two general scenarios that will define my approach: either risk appetite holds up / remains unchanged or there will be significant progress towards unwinding overleveraged speculative positions. Regardless of which path the market takes though there are opportunities to be found.

...

Should speculative interests hold the line or rise; we need to look for those pairs that are best positioned for carry or fundamental appreciation. On that list, we have a few interest candidates. Following behind EURAUD, GBPAUD could slip below 1.58 to complete a congestion reversal. Another pound-based pair, GBPJPY has closed above its long-term channel top for the first time since May and could look for meaningful follow through. And, a third sterling setup could be GBPCHF with a break out of its range, 61.8 percent Fib level and above a larger descending trendline at 1.54. If we don't want pound exposure, there is also USDJPY. While I'm already long on a small size position, there is an interesting near-term wedge pattern with an 82.80 top that could supply a breakout.

...

Alternatively, fulfilling a long-overdue risk-based correction would likely carry much more momentum. That said, there are two speeds this could play out. If risk aversion is FX specific, the level of activity will be limited. But, if the S&P 500 collapses in a sign of market-wide risk aversion, we could have a serious trend on our hands. We will be watching for this complicity with EURUSD as its stares down a prominent 50 percent Fib and potential H&S neckline around 1.3575. GBPUSD offers a less concise look at the dollar in a choppy but possiblity aggressive reversal below 1.6025. EURCHF has put off its H&S pattern for long enough; so a 1.2775 neckline could come back into view. For an alternative view of GBPCHF, that range described above could hold and lead to a good low-risk trade below 1.54. Finally, a pair that could see a breakout regardless of the underlying trend for risk coudl be USDCHF breaking its wedge and above the 50-day SMA at 0.9585.

...

And, to end my week off with a lesson learned, my short-term AUDCHF channel play from Thursday ended up hitting its stop. Not only was my trendline too generous; I ignored the risk in the RBA statement. Perhaps my only redeeming feature of this setup was the tight stop.

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