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AUDUSD Rebound Fading, EURUSD Already Makes its Turn

AUDUSD Rebound Fading, EURUSD Already Makes its Turn

2011-03-24 01:03:00
John Kicklighter, Chief Currency Strategist
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We are starting to get a divergence from different pairs and markets that is emerging as volatility settles. Following in the wake of the Japanese crisis and leading into the possible revival of a European route, much of the market is holding to the sidelines to get a sense of direction and conviction. This means the outlook is highly volatile - meaning the potential of a major bearish or bullish trend (regardless of where you look) is likely. In other words, we can't be too dedicated to a single position on sentiment and the trades that would follow that pattern.

...

Following my medium-term bias, the most likely outcomes for the upcoming event risk and the recent fading momentum; I believe the most likely outcome is for a second round decline to follow last week's sudden drop - except this one will have staying power. That being the case, one of the more interesting pairs in my book is AUDUSD given its recent correlation to the S&P 500 while its relative bearings are somewhat off (the equity index is holding below a former support level and the currency pair is closer to its absolute high of the past five months. I've taken a small, speculative short from 1.0125 and have a 100 point stop and first target to begin with. We have confirmation of reversal, I'll add to it. An alternative view on risk could offer up NZDUSD as an alternative should it break above 0.7450.

...

With my view on underlying sentiment, it makes sense that I'd be watching the yen crosses more closely. Yet, I'm being very selective with this pairs. I had a small short on CHFJPY from late yesterday at 89.75; and it already hit its 75 pip initial target. I may add to this pair should it extend its reversal as it is less prone to the extreme volatility associated to yen flippancy. Another yen pair that is interesting is EURJPY. Having reversed from a very long-term range high at 115, it is facing heavy event risk in the EU summit and fading risk to double up on its pain. As for USDJPY, I'm waiting until we can move back above 82 as longer-term fundamentals come back into view. Further, I haven't moved on AUDJPY because the correlation to risk is too high and the carry too costly to wait around on.

...

The euro and pound are two other very interesting currencies. The pound dropped back after the BoE minutes; but the potential for rate hikes is just as high after that statement was released. In contrast, the outlook for rates is not nearly as convincing as the potential for financial instability behind European finances. That being the case, I'm still waiting for 0.8660 to give for a short on EURGBP. I didn't place a limit entry on that short EURUSD setup laid out yesterday; but I'd consider jumping in on a temporary bounce.

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