This text is from blog famous currency strategist Joel Kruger .
MORE ROOM TO DROP – Not a whole lot going on in the markets into Monday, following a fairly active week of price action. In my view, the key focus is on the technical front, with some major currency pairs putting in reversal weeks, to potentially warn of deeper setbacks ahead. The most notable weekly reversal has come from EUR/USD, with the price dropping back sharply to erase any gains from the week before, while also ending a sequence of consecutive weekly higher lows. The Euro seems prepared to retest some rising channel support in the 1.3200′s this week, and it will be interesting to see if this channel will be supported, to once again keep the bullish structure intact, or if it finally will be broken to open a broader underlying bear trend resumption off of the record highs from 2008.
THE COMMODITY BLOC – Still, the more compelling price action in my view has been the price action on the commodity bloc (AUD, NZD, CAD), with these traditionally risk correlated currencies losing their shine, and relatively underperforming in recent weeks, even despite ongoing strength in global equity markets. The breakdown in this correlation has been intriguing, and most probably warns of some bigger moves ahead. As we look at the cycles and analyze the longer-term charts, it is very clear in my opinion, that the commodity currencies are trading close to their cycle highs against many of the major currencies (USD, EUR, GBP), and look like they are in the process of carving some major longer-term tops. As such, irrespective of your views on EUR/USD or GBP/USD direction this year, we really should see a continued underperformance on the commodity bloc against these major currencies (just look at any major/commodity pair chart since 2008 and you will see what I mean).
THE BACKSTORY – These commodity currencies benefited greatly pre-global crisis on the booming economic times, but then found artificial support over the course of the past 4 years, as market participants shifted their funds away from the exposed US and Eurozone economies, into the more immune, and higher yielding commodity bloc. The added incentive of buying into these currencies on the back of global monetary easing only further inflated these markets, and now that we are in the final innings of this historic ultra-accommodative central banking, look out below, as these currencies gravitate back to reality.
STRANGE THINGS – The unconventional (but necessary) reaction to prop the global economy over the past several years, has also produced some equally unconventional reactions on the commodity bloc, with these traditionally risk correlated currencies also acting as safe haven investments. This is certainly not logical or healthy for that matter, and soon enough, we will see just how nasty the correction in these markets will be. One of the potential catalysts for this type of reversal will likely come from improved US economic data that signals the beginning of the end to ultra-accommodative Fed policy, while another potential related catalyst could be a very intense liquidation in global equity markets which remarkably trade just off record highs from 2007 (see S&P). If you look closely enough, you can see the wheels are already in motion, and if you wait too long to take notice, you just might get run over.