This text is from blog famous currency strategist Joel Kruger .
AN OPPORTUNE RALLY – While I can’t say I am completely pleased with the latest bounce in the Australian Dollar, I am also not entirely disappointed with the move. I currently have short Aussie exposure through the USD and Euro, with my USD exposure now at cost (1.0370) and my EUR exposure modestly in the money. I will now look to increase my short AUD/USD and long EUR/AUD exposures on any additional Aussie weakness over the coming sessions. Should we see an AUD/USD move towards 1.0450, I will add to my short, and should we see a EUR/AUD drop to 1.2400, I will look to add to my long. The latest Aussie surge on the back of the blowout employment data is massively overstated, and once again, when you look beyond the headline, things are not as rosy as they appear.
See daily forex technical analysis made by Joel :
LOOKING BEYOND THE HEADLINE – True, there is no disputing the data was in fact better than expected, but at the same time, the bulk of the employment increase came from part time jobs, while there was no change to the unemployment rate. Moreover, any data series that shows this much volatility is also questionable in my opinion. Oh and let us not forget the Australian Dollar trades much more on external factors than domestic ones. The correlation with equity markets is still quite high, and when equities fall off (and they will), you can bet Aussie will fall with them. This is not to say that I think the Australian economy is in good shape by any means. I am quite certain there are stresses in the Australian economy that have yet to fully manifest (ie the disparity between the western and eastern Australian economies), and these stresses will become more pronounced when 1) equities decline, 2) China shows more vulnerability, and 3) the Fed signals an end to ultra accommodative monetary policy.
WHERE IS THE EURO HEADED? – As far as EUR/USD is concerned, I think we need to be focused on a near-term retest of the November 2012 low at 1.2660. Any rallies from current levels should continue to be well offered towards the 1.3200-1.3300, and a fresh lower top is now sought out ahead of this next major downside extension. I suspect that a combination of bad news out of the Eurozone, via some of the peripheral economies, and some less than dovish talk from various Fed officials over the coming days, will be enough to keep this market on the defensive.
CAN’T STOMACH THIS ONE RIGHT NOW – Moving on, the Yen has also been a fascinating currency to watch, and though I remain aggressively bearish in the medium and longer-term (bullish USD/JPY), I have been having a hard time reconciling my bearish fundamental and medium/longer-term technical outlook with the short-term technical picture. Short-term, technical studies are violently overbought, with the weekly RSI recently trading to record levels. As such, it is very hard to argue against the need for some form of a correction which sees USD/JPY back towards 90.00 before considering an assault on the 100.00 barrier. Still, I have taken my shots over the past week, with both attempts showing no follow through (I sold last Friday at 95.00 and exited for 15 point profit and then sold again this week at 95.60 and exited for 15 point loss). While I still believe we see a sizable short-term pullback from here, I simply can’t stomach the short side of this trade any longer. I will say this however…If we do see a drop that results in an oversold USD/JPY market on the daily chart, I will not hesitate to establish an aggressive long USD/JPY position.
BEST TRADE MIGHT NOT BE FX – So where is my next big trade? I actually will look to step outside the FX markets and start to build a short position in the S&P. US economic data has been consistently solid over the course of the past several months, and it looks like the US is on a legitimate path to recovery. This should start to force the Fed’s hand a bit, and I suspect we will soon see Fed officials talking a little less dovish than they have in the past. Equity markets have unquestionably benefited from the incentives of aggressive monetary easing measures and will be exposed when the Fed signals an end to loose policy. If you are not living in the US, the short S&P position could prove to be doubly sweet, as I believe you will stand to benefit from the drop in the S&P and concurrent appreciation in the US Dollar (against your local currency) on a combined flight to safety and yield differential play (as the Fed starts to plan for its exit). I have just sold some S&P at 1556 and will look to build into this short again at 1576 and then again at 1625, if given the opportunity. I am looking for a drop back towards 1300 over the course of the next 6 months.