This text is from blog famous currency strategist Joel Kruger .
THANKS FOR GIVING US A SHORTER WEEK – Wednesday will be the last full day of trade for the week, with market participants in the US running off the desks into today’s close to celebrate the Thanksgiving holiday. Clearly, the big development for the day has been the inability for EU FInMIns and the IMF to come up with a solution on Greece, despite every expectation and indication that a deal would in fact be in place by now (and not next week). I believe the market reaction is more reflective of a general lack of confidence in EZ leadership, rather than any belief that a deal won’t in fact get done. But at the end of the day, it isn’t always just about the results.
See forex daily technical analysis video made by Joel:
WHO’S RUNNING THE SHOW – The disjointed nature of leadership within the EZ has been a thorn at the side of the recovery in the region over the past few years, and while we have seen some glimmers of light, mostly from the ECB, there is still a feeling that all could fall apart at any moment. If we are to compare the Eurozone economy with other major economies, the one clear disadvantage has been the fact that the Eurozone economy is made up of several countries. While other economies have had to deal with the global recession, having one centralized government (one country) making decisions already puts these economies several steps ahead. People like the idea that they know who is in power and who is making decisions, even if these decisions might not always be the best.
IT’S NOT ALL GREEK TO ME – In reality however, the Greece story on its own is irrelevent in the grand scheme. The technical picture has been warning of medium-term Euro weakness for some time now, and continues to project setbacks in EUR/USD back towards and below the 2012 lows at 1.2040. Fundamentally, it seems that macro traders are positioned to sell the single currency against the buck on any excuse it might find. Fundamentally, it is also my firm belief that the US was the first into the crisis, and will be the first to emerge from crisis. This also lends to the idea that the US Dollar will continue to find bids across the board.
LAST MAN STANDING – In my view, should we continue to see stress in the global economy, the US Dollar will benefit from safe-haven bids. This time however, the US Dollar appreciation in risk off trade will be even more accelerated, with the Franc and Yen no longer the viable safe haven options they once were. On the other hand, should we see a more optimistic scenario play out, where a sustained global recovery kicks in, US yield differentials will be the name of the game, and drive the US Dollar higher as the Fed begins to aggressively reverse monetary policy. Rates in the US have fallen so far in recent years, that any reversal of policy would narrow yield differentials back in favor of the buck. So net net..risk off = higher USD and risk on = higher USD. I believe the USD will drive higher initially on risk off bids, and then find additional demand into H2 2013 as the recovery starts to show real signs of light.
AUSSIE MORE EXPOSED THAN EURO – For today, the Euro has already reversed quite sharply after stalling above 1.2800. Next key support comes in at 1.2690, which guards against the recent 1.2660 base low. Look for a daily close below 1.2765 on Wednesday to confirm bias and open the door for a fresh downside extension towards 1.2500 further down. At the same time, only a daily close back over 1.2830 would delay the bearish outlook. It is also important to note that the weakness in the Euro is not Euro specific (don’t be distracted by Greece story), and the price action is also a broader reflection of downbeat global sentiment. This should therefore expose some of the other risk correlated economies around the globe, and could in fact weigh more heavily on their respective currencies. As such, I would be on the lookout for underperformance in the Australian Dollar, even against the Euro going forward (EUR/AUD higher).
BUY MORE USD/JPY ON DIPS – Finally the Yen. While I have been positioned long USD/JPY for some time now, and am happily reaping the rewards, I am going to go ahead and issue a warning that we could soon see a bit of profit taking over the coming sessions. Daily technical studies are overbought and a healthy retreat would not at all be surprising. That being said, I AM NOT recommending a short USD/JPY position (I am already long below 79.00), but simply highlighting the fact that if you are long, you might want to take some off the table here (around 82.00), and look to re-buy into the next dip. Overall, the risks are shifting dramatically in the USD’s favor, and I suspect we could see a retest and break of the current 2012 high at 84.20 sooner than you think. Ideally, I would love to see a pullback to the 80.50 area, where I would be an aggressive buyer.
