This text is from blog famous currency strategist Joel Kruger .
FOREST THROUGH THE TREES – Spain’s request for aid, a Japanese multi-billion USD M&A transaction involving Softbank’s interest in Sprint Nextel, and some solid US economic data, have all been influencing markets over the past 24 hours. Throw in a fairly busy economic calendar for Tuesday and things could get even more interesting. However, I would rather just focus on the broader price action and block out all of the noise. After all, the short-term fundamentals are irrelevant, and we need to see the forest through the trees.
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KEY OBSERVATIONS – With that said, here are some general observations: 1) EUR/USD has been well bid, but given how my core outlook is aggressively bearish, there just might be an opportunity over the coming sessions to establish a fresh short position. 2) Despite the run up in the Euro over the past several sessions, other currencies have been lagging, and I believe this could be quite telling. 3) USD/JPY is on the bid and could once again be on the verge of a key bullish breakout.
END OF THE LINE – If we look at the broader price action in EUR/USD, this is a market that is still locked within a very well defined medium-term downtrend off of the 2008 record highs, despite the latest bout of strength. While I don’t recommend selling blindly at any level, I think if we pick our spots right, there just might be a good short entry to be had. My methodology always has me looking to sell strength and buy weakness, so in this case, the move would be to look to sell the Euro further up. I also never chase, so if the market doesn’t hit my level, then no worries and we move on to the next opportunity. For today, I recommend selling EUR/USD at 1.3055, with an open target and stop-loss only on a daily close above 1.3200.
CORRELATION BREAKDOWN- Moving on, as we look at some of the other major currencies, it becomes quite evident that these currencies are not reacting in the same way to EUR/USD strength as they once had. Currencies that had normally outperformed even the Euro in periods of USD weakness are no longer doing so. Commodity bloc currencies and EM currencies that had found relative bids in periods of USD weakness on the attractive yield differentials are no longer as appetizing, and this could warn that the current USD sell-off has nothing to do with any legitimate risk on trade. This makes the EUR/USD rally all the more suspect, and offers further evidence that we just might see the major currency pair roll back over in the days ahead.
FLYING ABOVE THE CLOUDS – Finally, USD/JPY has been on the move a bit and the price action should not go unnoticed. At this point, there is nothing truly exciting to talk about. However, I have been tracking the daily Ichimoku cloud in the pair for some time, and the indicator has proven to be extremely enlightening. USD/JPY has not been able to close above the top of the daily Ichimoku cloud since April. Therefore, if we do finally get that daily close above the Ichimoku cloud, this could open the door for a major bullish breakout. The top of the cloud currently resides at 79.00, so a close above this level on Tuesday would be a very big deal! Let’s see what happens. I am already long USD/JPY and am looking for a retest of the yearly highs at 84.20 over the coming months.