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EURJPY Makes its Break and EURUSD Stands as a Good Fundametnal Buffer

EURJPY Makes its Break and EURUSD Stands as a Good Fundametnal Buffer

2011-03-30 03:38:00
John Kicklighter, Chief Currency Strategist

I am still waiting for a major thematic shift in the currency and capital markets. This could be a reversal in risk appetite itself which further disseminates into the FX market or it could be something region-specific like the deterioration in European financial conditions finally catching up to the euro. I think both of these examples is a real possibility in the near future; but there may be something to move on now. Particularly, I'm interested in EURJPY as it has finally broken out of congestion that has been in place for nearly 10 months. This is a long overdue reversal; but its foundation is really founded in technicals. Fundamentally, I think the yen can depreciation further due to long-term budget issues and the short-term G7 threat; but a steady euro advance is a difficult one to be very confident in. Considering my concern; I have reduced the size of the position and will add if it gains momentum. With an entry of 116.45; I have put in a 175-point initial stop and first target.


Given my fundamental outlook, I think it is worthwhile to look for setups that offer a well-positioned euro short opportunity and perhaps offset the EURJPY risk. It just so happens that EURUSD is the perfect pair. The fundamental weight has built up on this pair; but it has stubbornly tried to hold its bearing through the headwinds. This momentum won't likely hold for long; and a rate hike likely won't compensate for the new issues that the shared currency is facing. That said, it is important to be patient and what until the market gives up on the push. Therefore, I wait for a drop below 1.4020/00 along perhaps with a fundamental push. Other appealing euro opportunities include EURNZD should it break its big 38.2 percent fib (and perhaps it is also a head-and-shoulders neckline at 1.8550 while EURCAD could offer a short run should 1.37 give.


On the other side the pair we have started with, the yen can present opportunity in other pairs as well. The remaining CHFJPY short interest hit its trailed stop at break even; so it was netted out for a first target of 75 points on the first half. In its place, I have taken a small USDJPY long as it has pushed above 82 - a reversal I was waiting for to signal reentry on the longer reversal. This pair could move far over the long-term; but we need to remain cautious of near-term volatility.


Other pairs I think have great potential include GBPUSD should it close below 1.5965; AUDUSD given the scenario that it starts topping and pitches into a real reversal and USDCHF moving above a 0.9240 Fib in its larger reversal. We need to keep our eyes open. Should risk trends reverse across the board, we will have a glut of optoins available to us.

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