This text is from blog famous currency strategist Joel Kruger .
NEED TO PAY MORE ATTENTION TO BERNANKE – The most recent Bernanke comments which warn of the risks associated with a US “fiscal cliff,” and ongoing Eurozone crisis should not be taken lightly. I am actually rather surprised to see markets hold up so well despite the Fed Chair remarks and believe that risk correlated assets are due for a material liquidation over the coming sessions. This should translate into lower global equities, lower currencies and a stronger US Dollar. Once again, the fact that US equities have climbed back to some 10% off of the pre-crisis record highs from 2007 is nothing short of absurd and all I can hear in my head is Soul II Soul’s 1989 chart-topping hit “Back to Life, Back to Reality.”
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LOOKING AT THE CHARTS – Technically, not a lot has happened over the past several days, although there have been some noteworthy developments. EUR/USD is contemplating a close back below the 20-Day SMA, and we have not seen such a bearish close since August. Meanwhile, GBP/USD has been unable to establish any momentum since recently posting fresh 2012 highs just over 1.6300, instead, coming under pressure and considering the establishment back below the 10-Day SMA. Elsewhere, USD/JPY has been creeping back, with the major pair looking like it may want to hold over 78.00. But USD/JPY still has a good deal of work cut out for it if there is to be any legitimate bullish momentum, with a break and close back over 79.65 ultimately required to make any waves.
LOOKING AT THE BOOK – On the strategy front, I remain aggressively US Dollar bullish, and have chosen to exercise this view via USD/CAD and USD/JPY. While there may be other more attractive long USD plays out there, I like these trades as short CAD and short Yen offer the luxury of a lower cost of carry. Fundamentally, with respect to CAD, I contend that investors are not fully aware of the intense risks to the Chinese economy and the impact further deterioration will have on the global economy. The commodity linked Canadian Dollar should therefore come under pressure as China continues to slow. With respect to the Yen, the ailing Japanese economy and well publicized government warnings against excessive currency appreciation should start to weigh more heavily on the local currency. For now…I remain patient and look forward to seeing some good follow through on these trades over the coming weeks.
