This text is from blog famous currency strategist Joel Kruger .
END OF YEAR PUSH – We are down to the final days of the 2012 and markets are still a lot less volatile than I would have expected for this time of year. More often than not, these final days are used as an excuse to push markets in one direction or another. While the US Dollar has come under some broad pressure, the moves have been far from extreme at this point. Still, you could argue that these moves have been isolated to the Yen (one exception of USD strength), with the currency getting slammed across the board and dropping to fresh yearly lows against the buck.
See daily forex technical analysis video made by Joel:
FISCAL CLARITY – Fundamentally, a lot of the focus in recent weeks has been on the US fiscal cliff and whether or not a deal can be reached by the end of the year. Reports over the past 24 hours have been rather optimistic, and it now seems like a resolution is near. Nothing has been confirmed of course, but the specificity of the deal terms from various sources suggest that expectations for a deal announcement any time soon are completely legitimate. For all the details, feel free to check out this article from the Washington Post.
WILL THEY BUY IT? – As far as the impact of an actual deal on the markets is concerned, the question will be whether investors are simply content with any form of a deal, or whether they will reject the resolution on the basis of the deal being far from perfect, and nothing more than a rushed political process to generate positive PR for the government. If markets do buy into the deal, it could put pressure on the US Dollar as risk correlations stand, while a lack of confidence would likely open some fresh save haven USD bids.
MORE PRESSING THEMES – For me, the US fiscal theme is not as relevant to FX as many might think. The key drivers of the US Dollar going forward will be ongoing instability in the Eurozone, and renewed fears out of China and the emerging markets. I think these themes will dominate the headlines for 2013, and the resulting trade will be hugely US Dollar bullish. The year ahead will be a year where market participants realize just how ahead of the curve the US has been in dealing with the global slowdown, and the US Dollar will benefit initially on flight to safety flows, and eventually on favorable yield differentials as US unemployment starts to gravitate closer to the critical 6.5% level.
TACTICAL CONSIDERATION – Strategically, there are some attractive set-ups out there right now that could prove to be highly profitable into year end. As I scan the markets, the New Zealand Dollar looks to be the most overvalued at current levels, and my recommendation would be to seriously consider fading the currency’s strength. For short-term traders, NZD/JPY could be the most attractive, as this cross rate is sitting in violently overbought territory on the daily chart, with the RSI recently tracking above 85 and begging for a corrective decline. Medium and longer-term however, I would be more inclined to consider either a short NZD/USD or long EUR/NZD position at current levels. Both trades are super attractive, and it really comes down to your USD views to consider which might be more suitable for your risk profile.