This text is from blog famous currency strategist Joel Kruger .
FICKLE MARKETS – Markets have been very quiet in the early week, and it is really no surprise given the move seen in the Euro on Friday. With EUR/USD surging through barriers at 1.2800, many have been caught scratching their heads, wondering if there is still more to come. It is always amazing to see just how quickly traders forget why they were so bearish a given market, and how easily they are able to adopt an opposing view with similar conviction. Just a couple of weeks back, all of the analysts were talking about EUR/USD 1.2000 and now all we hear is EUR/USD beyond 1.3000. However, if we are able to take a step back and look at the bigger picture, EUR/USD is still locked within a more well defined medium-term downtrend and should theoretically soon put in a fresh medium-term lower top ahead of the next drop back towards and eventually below 1.2000. As I have said in previous reports, while a good deal of downside risk has been priced out of the Eurozone, there are still many obstacles that lie ahead, which should continue to weigh on the single currency against the buck.
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THE RETAIL VARIABLE – Moving on, USD/JPY remains locked in a very tight multi-week consolidation, with the market well offered on rallies above 79.00 and supported on dips below 78.00. Yet, the fascinating thing here is that despite the lack of volatility and clear directional bias, retail positioning shows an overwhelming amount of long positions. The ratio is quite disturbing and is often a strong contrarian indicator which would suggest that we still could see another round of weakness back into the 77.00′s before any consideration is to be given for a legitimate recovery rally. Simply put, in order for USD/JPY to manage a significant rally, the ratio of retail longs will need to level out dramatically. There are two ways this can happen. The first is a sharp pullback which triggers stop-losses on retail longs, and the second is an aggressive move higher which forces premature profit taking on existing retail longs, which also levels out the ratio. But irrespective of what happens, I remain aggressively bullish over the medium and longer-term and will be looking to build a more significant long position on the next break back over 79.00.
COMMODITY BLOC FX MELTDOWN – Elsewhere, USD/CAD has not been able to pop back over 0.9800 just yet, and while we still could see some more weakness, I am long this pair from 0.9790 and will be looking to hold over the coming weeks, in anticipation of a meaningful rally back above parity and towards 1.0500. This is a market that has been very well supported over the past few years at current levels, and a market that also tracks by longer-term cyclical lows. I am looking for a big move in the fourth quarter of 2012 and throughout 2013. Finally, I continue to project relative underperformance across the entire commodity bloc and emerging market FX space over the next 12-15 months, and the Australian Dollar is likely to suffer a good deal. I have already warned of the negative impact on the Australian Dollar from the ongoing deterioration in China, and we have been seeing this play out through lackluster Australian economic data. The latest Australian NAB business confidence showing was weaker than expected, while Moody’s downgrade of South Australia’s debt rating should also fuel additional underperformance.
Ariad Pharmaceuticals (NASD: ARIA) : Equity markets are already looking stretched in general and with stocks expected to come under broad pressure, look for some weakness in this pharmaceutical as well, which is tracking well in overbought territory and plenty due for a material pullback. Monday’s bearish close after posting fresh highs sets the stage for a retreat back towards the $19.00 area at a minimum, while any additional rallies should be very well capped below $23 on a daily close basis.