This text is from blog famous currency strategist Joel Kruger .
WEDNESDAY, JANUARY 23, 2013 – THORN AT MY SIDE – Not a lot to offer in terms of any significant updates going into Wednesday trade. The Yen and Franc have managed to finally enter a long overdue period of corrective price action, while the Australian and New Zealand Dollars remain stubbornly well bid despite some contrasting local fundamentals which would have both currencies tracking lower. The past six months of trading on my own has been a fantastic experience and I wake up each day thankful for this opportunity. I have been seeing the markets pretty well, and the markets have been rewarding my analysis for the most part. Still, the Australian Dollar (or at least AUD/USD) has been a nuisance, and a major thorn at my side. My short position from just over 1.0400 has been out of the money pretty much for the entire duration of the trade thus far, and the negative carry has not helped matters.
See daily forex technical analysis made by Joel:
A VERY SLOW GO – Even more frustrating, is the fact that during this time, economic data has been mostly anything but supportive of the Australian Dollar (including latest data in the form of softer inflation). Clearly, the attractive yield differentials and global risk sentiment (US equities at 5 year highs) have been major factors, but at the same time, I still believe the Australian Dollar is poised for a substantial decline against the buck over the coming months, and is in the process of carving out a longer-term cyclical top. As per my strategy from the outset, I will only exit this short position on a weekly close above 1.0700, and will be looking for a daily close back under 1.0500 to fuel the necessary spark to get this trade going again. While the financial setback will sting if I am wrong, I am far less concerned with this than the deep wound to my psyche if I am not able to participate in the Aussie collapse once it finally does play out.
IRRATIONALITY AND SOLVENCY – I believe the markets have indeed been quite irrational and selfish with this trade for some time now, and I am hoping that maybe just this once, my position will remain solvent longer than the market remains irrational. At the end of the day, I sat on long USD/JPY and long EUR/CHF positions for a good amount of time and was very patient. The patience paid off nicely with those trades, and I firmly believe the same to be true in the case of the short AUD/USD position. The AUD/USD trade just requires a bit more patience, as trend reversals in positive carry are generally far more difficult to get going. But once they do….look out below! Global coordinated intervention and government proponomics (bailouts) have incentivized the Aussie yield play to this point, but as governments begin to pull in the reigns, this trade will lose a lot of traction. Mark my words.
THE END OF THE POUNDING? – Moving on, it might be worth taking a look at the Pound over the coming sessions. While I would be less inclined to recommend a long position in Cable (GBP/USD), I believe we could see some relative GBP outperformance on the crosses. The UK currency has been beaten down in recent weeks, to leave the currency technically oversold against many of the major currencies. The inclement weather, concerns over growth prospects and fears of triple dip recession have all contributed to Sterling weakness, yet at this point, the risks could be on the verge of tilting back in favor of the Pound. From a strategy standpoint, my recommendation would be to look for an opportunity to fade additional Pound weakness into the latter half of the week. Perhaps the economic data out on Wednesday and Friday could provide the necessary spark. I already cited EUR/GBP and GBP/AUD in previous reports this week, contending that there should be limited GBP downside from here on these crosses (EUR/GBP should be well offered ahead of 0.8500 and GBP/AUD should be well supported on dips below 1.5000). Finally, for EUR/USD, 1.3250 remains the key level to watch. A break and daily close below should open the door for a bearish resumption and downside acceleration back under 1.3000.
