This text is from blog famous currency strategist Joel Kruger .
EURO OUTLOOK CONFIRMED – Although most of the exciting price action for the day was seen in early Asia, the ability for the Euro to clear buy-stops and extend gains towards 1.2450 is significant in the short-term and likely opens the door for fresh upside beyond 1.2450 over the coming sessions. All of last week I had maintained my short-term bullish outlook for the Euro, given the bullish outside week formation we had seen in the week before last. While the bullish follow through last week was anything but smooth, at the end of the day (or week literally), the market did what it was supposed to technically, and closed higher after also putting in a weekly higher low and higher high.
DON’T RULE OUT 1.3000 RETEST – The fundamental catalyst to this point seems to be coming from a combination of stabilization in the Eurozone, and solid data out of the US which decreases the prospects for any imminent implementation of additional QE from the Fed. From here, there is likely to be another fundamental catalyst which exposes the US Dollar to more short-term weakness and triggers a more substantial corrective rally in the Euro towards the 1.2700?s, with the potential for additional gains to more critical resistance at 1.3000, before we see underlying bear trend resumption and renewed US Dollar bullish sentiment.
SHIFT IN MARKET DYNAMICS – In my opinion, this next Euro rally will also be significant as it will mark the first time in quite some time that the Euro will lead the way and outperform other currencies in the face of the broad based USD sell-off. We are already seeing signs of potential bottoms in some of the major Euro cross rates, and I believe that as the Eurozone starts to show more signs that the region is not on the verge of an apocalypse, more Euros will flow back into the Zone. The news does not have to be all good for this to happen, as a good deal of Euro strength can still come from a pricing out of the worst case scenarios. As such, I would be looking for major upside in negative carry crosses like the Euro/Commodity bloc currencies over the coming months, and in the less painful (from a yield differential standpoint) EUR/JPY cross rate. I would also stress that I see upside in these cross rates, even when the US Dollar comes back into favor and the Euro begins to slide again. The commodity bloc (EMs as well) and Yen will just slide more rapidly.
NOT ABOUT THE MONEY – I am already long the EUR/AUD cross from 1.2000 with a target of 1.4000 and stop-loss only on a close below 1.1500. The trade has not shown any follow through to this point, and has come quite close to the point of exit. While I am perfectly capable of handling the loss on my book (about 3% total equity at risk), I would be very disappointed to not see this market show the follow through that I am looking for. I am extremely bullish both technically and fundamentally, and would very much like to see the necessary base carve out ahead of an intense upside acceleration that matches the stomach turning drop we have seen in this market over the past few years. Technically, even a material short-term bounce of 10 big figures is well overdue, while fundamentally, the anticipated shift in the global crisis from the Eurozone to China, should justify the major reversal given the pricing out of downside in the Euro and pricing in of underperformance in the China correlated Australian economy.
THE YEN TEASE – Finally, the Yen continues to frustrate both sides, with any rallies being well capped and dips equally well supported. This latest dip from Friday looked rather promising, with USD/JPY breaking back over some key resistance at 78.70. But inability for the major pair to close above 78.70 proved costly for bulls, with the price retreating once again back below 78.50. My overall outlook is highly constructive for the pair, but at the same time, I am looking for a daily close back over 78.70 at a minimum to get me excited about the possibility of this market accelerating to the upside. Until then, buying dips back into the 77.00?s is the preferred strategy. Otherwise, stand aside and wait. Ultimately, only a USD/JPY close below 77.00 would compromise the constructive medium and longer-term outlook which sees an eventual push back over the current yearly high at 84.20 over the coming months. Initial key topside resistance comes in by 80.60.
