This text is from blog famous currency strategist Joel Kruger .
QUIET YET CONVINCING – Although the market didn’t really go anywhere at all in the previous week, the price action in EUR/USD was definitely of interest and helped to keep my broader bullish USD outlook intact. Inability to extend gains towards 1.3200, followed by the sharp reversal back below 1.3000, and eventually just under 1.2880, set up a key bearish reversal, with the market putting in an outside week formation. Technically, this is quite bearish, and should now open the door for deeper setbacks in the final days of the year. Next key support comes in at 1.2660, and a break of this level will accelerate declines and expose the medium-term base in the form of the 2012 low at 1.2040.
See daily forex technical analysis video made by Joel:
THE CATALYST – Fundamentally, the catalyst for a pick-up in USD buying this week will likely come from a combination of broader risk off price action and safe haven bids in the buck, along with a Fed rate decision mid-week that is not as overly accommodating as many are pricing. Risk off price action could likely come from continued pressures in the Eurozone, while I would also expect to see China concerns creep back into the headlines. Over the past few weeks, market participants have grown more optimistic with the China recovery, but I contend this optimism is nothing more than a mirage.
TECHNICAL EVIDENCE – Part of this bias is also supported by the technicals, with correlated markets like the commodity bloc currencies outperforming, despite the renewed pressure on the Euro. Yet the technical picture in my view, shows these commodity currencies overvalued at current levels on a medium-term and longer-term basis, and well overdue for some serious bearish price action. Currencies like Aussie, Kiwi and Cad all are expected to sell-off mightily in 2013. For this to happen, there will likely be a manifestation of fear and uncertainty over the China outlook. The latest trade data out of China is certainly disconcerting and could start to make a bit of a dent in any risk positive sentiment towards the country’s economy.
FADING THE ONCE SAFE-HAVENS – Moving on, I continue to look for opportunity to build into an existing long USD/JPY position with the market expected to extend the current recovery towards and through the current yearly high at 84.20. However, I will only look to add into a dip below 81.00. Meanwhile, despite some harsh setbacks in the latter half of the previous week, the EUR/CHF cross rate is still looking highly constructive, with the early week surge keeping the market on the bullish side. As such, buying this latest retracement back into the 1.2060-80 area is viewed as a formidable opportunity. Look for an eventual break back over 1.2185, while any setbacks should be very well supported above 1.2030 on a daily close basis.
