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Direciton for Euro and Dollar Less Certain than You May Think

Direciton for Euro and Dollar Less Certain than You May Think

2011-05-10 01:23:00
John Kicklighter, Chief Currency Strategist
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Following the dramatic decline in EURUSD in the final 48 hours of trading last week, many FX traders may think they hav it all figured out. A break has been made a reversal imprinted. However, I'm more skeptical of the aggressive move we witnessed. While we have certainly taken advantage of the big drop as was planned ahead of time; we need to always question the conviction behind a move. It is better to constantly question what is wrong with our trade and come up clean than it is to list all the things we like about it and delude ourselves into thinking it is a perfect move. I'm certainly skeptical of the euro's fundamental health and I also believe that the dollar is oversold for a number of reasons; but then again, I'm realistic enough to recognize that the market doesn't just have to go in my direction because the fundamentals say so...

...

The reversal from EURUSD was long overdue; but follow through isn't guaranteed. We have seen too many instances where European officials have been able to buy time for the financial troubles they face; and the markets once again turn to rate expectations to guide their positioning. As such, I will simply trail on the EURUSD short (moving it up to 1.4650 - beyond the entry at 1.4730) and see what momentum can come of it. In the meantime, a short-term euro correction could retrace this initial move. A good looking technical setup to offset this move is EURCAD; which is facing the bottom of its rising trend channel which happens to coincide with a 50-day SMA and significant Fib. A long from 1.3815 with a 100-point stop and target on a lower position size seems a good offset. A few other euro-pairs to watch in the case of a significant move. EURJPY at its former long-term range resistance at 115 is now playing at support, EURGBP is making a temporary base of 0.8740 and EURCHF is eyeing its historic low as a potential triple-bottom break or reversal (this and all of the pairs depending upon what news crosses the wires.

...

Outside of the euro, I have decided to take a long position on CHFJPY from 92.05 (with a 85 initial stop and 110 pip first target) as the pair seems to be taking the opportunity to make a double bottom on a former channel top; which is buffered by the fact that we have two safe haven currencies in the pair. Then there a NZDUSD short from 0.7935 (with another 100 point buffer on both sides) on a small size that would play well to a true reversal on the preceeding bearish break and ongoing risk aversion effort.

...

Other notables include GBPCAD which is chopping back and forth between a rising trend channel (much like EURCAD); AUDCAD which has already bounced from resistance and is following the yield track on a level commodity currency pair, and USDCAD which would look good on a true reversal with a confirmed break above 0.97 and 0.98.

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