This text is from blog famous currency strategist Joel Kruger .
THURSDAY, AUGUST 23, 2012 – THE POWER OF THE CHARTS – Price action continues to fall in line with the projections discussed over the past several weeks, and the Euro has managed to extend gains into the 1.2500’s thus far. The latest rally has been fundamentally driven on the back of a more dovish FOMC Minutes, although technicals have been warning of this push for some time. It is always amazing to see just how often the charts will clearly anticipate a shift in the construct of the market and foresee the fundamental catalysts which should ultimately materialize and bring on the change.
HOW QUICKLY WE FORGET – It is equally amazing to see how quickly sentiment shifts and how quickly market participants forget why a specific trade was so compelling, and then go even further to take the other side of that trade. For this example, a few weeks back, you couldn’t get anyone to buy into the Euro, and yet now, it seems like no one wants to be owning US Dollars. Such is the nature of the markets. However, as far as technicals are concerned, we are now finally nearing the objective discussed in the 1.2600 area.
DESTINATION REACHED BUT NEED TO FACTOR OVERSHOOT – There is a strong confluence of resistance around 1.2600, in the form of the 38.2% fib retrace off of the 2012 high-low move, 78.6% fib retrace off of the June-July high-low move, 100-Day SMA, and top of the daily Ichimoku cloud. As such, this could be the first area where we see some renewed offers within the underlying downtrend which is still very much intact. Still, while the objective looks like it will be met (with the market already getting very close to 1.2600), I would not recommend taking any fresh EUR/USD short positions just yet. Markets always have a tendency to overshoot and the key here will be to wait for a daily overbought EUR/USD reading before considering a new short.
THE EUROZONE-CHINA PASSAGE – Moving on, the biggest development (for me) overnight was the China data. I have been talking for some time of a shift on the horizon where the central focus of the global macro markets shifts away from the Eurozone and towards China, and this has been slowly playing out. We have already seen some very positive signs of unity and leadership out of the Eurozone, and at the same time, China data continues to disappoint, suggesting that things over there might be far worse than the soft landing many have been calling for. This latest China PMI data was much worse than expected and has opened the door just a bit more to the Eurozone-China passage. This shift in focus will unquestionably weigh tremendously on the China correlated economies, and as such, look for relative underperformance in the commodity bloc currencies and emerging markets.
UNHEALTHY CORRELATION – As a reminder, a lot of money has flowed into the commodity bloc and emerging markets throughout the US and European market slowdowns, with investors benefiting from the higher yield and flight to perceived safety. But once the tide turns, expect to see a massive liquidation from these long risk correlated investments. The absurdity of the safe haven lure will be highly exposed, while the attractiveness of yield differentials will become far less relevant and in fact narrow in favor the more traditionally safe haven bets. Look for outperformance in the Euro, USD and Pound against the commodity bloc and EM currencies.
LOONIE TUNES – In my analysis, I have spent a good deal of time outlining my bearish Aussie views, and today I will spend some time focused on a commodity cousin in the Canadian Dollar. USD/CAD has been under a good deal of pressure in recent weeks, with the market most recently dipping back below 0.9900. However, as things stand, any additional weakness in this pair should be very well supported around 0.9800 and I would expect to see a reversal over the coming weeks back above parity and towards the 1.0500 area. Once the Euro starts to top out again, this should help to propel this market. Remember, recent data has not been impressive and this coupled with my outlook for the commodity bloc, should also expose the Canadian Dollar which is due for a longer-term cyclical pullback (ie USD/CAD higher).