This text is from blog famous currency strategist Joel Kruger .
TAKE A CHILL PILL – Today I am issuing a warning, as I want everyone of you to be fully prepared. So here goes…..Just because I am aggressively US Dollar bullish across the board, does not mean that we won’t see periods of US Dollar selling. While it is unclear at this point how Thursday and Friday will play out, it is essential that you are not dissuaded, discouraged, or deterred from any bouts of USD selling. The Euro has basically been locked in a sideways consolidation for over a month now, and ultimately, anything between 1.2800 and 1.3200 offers no clear directional insight. While I am looking for the formation of a medium-term lower top in EUR/USD, ideally around 1.3200, this does not mean that we can’t or won’t see another attempt to the topside before yet another failure.
THE UNDERRATED INDICATOR – I use EUR/USD as a proxy for the entire currency market, and believe that as the Euro goes, so will the other currencies against the buck. Technically, I highly recommend using the ATR (Average True Range) indicator as a guide for fresh opportunities to sell the Euro (and currencies in general) into intraday rallies against the buck. Presently, the ATR for EUR/USD stands at 90 points, so selling any rallies that stretch 90 points off the daily low would be an ideal strategy for a fresh short entry in EUR/USD (1.3055 today). The same strategy can be applied to any currency against the buck. So if for example you are interested in selling AUD/USD, the recommendation would be to look to sell into a rally of 75 points off of the daily low (1.0420 today).
See daily forex technical analysis video by Joel:
BETTER SAFE THAN BAT SH-T CRAZY – Of course, I never like to force positions. So, if we do not see a rally that stretches the full ATR out of the US Dollar’s favor, the recommendation comes off the table. By extension, if the trade does in fact trigger, there is nothing wrong with exiting the position on the New York close (end of day) if the trade offers no follow through. Unless you are completely comfortable holding the position overnight, it is never a bad thing to exit and look for a fresh opportunity to sell the projected ATR extreme the following day. While it is true that this type of approach may result in some missed opportunities, the conservative nature of the short-term strategy also prevents unwanted declines.
WHAT FUNDAMENTALS ARE YOU LOOKING AT? – Fundamentally, I see no justification for any sustained currency strength from here. While a meaningful bout of US Dollar weakness was completely understandable and expected back in July when the buck was overbought across the board, and the worst case scenarios needed to be priced out of the Eurozone, there is no longer further justification for additional US Dollar weakness after a near 1200 point corrective rally in EUR/USD. The state of the Eurozone is still extremely fragile, while the outlook for the global economy remains quite bleak. Throw in the expected ongoing deterioration in China and the emerging markets (which are well due for relative underperformance), and the US Dollar becomes the only viable play, particularly with the Franc and Yen now fading from the safe-haven picture.
BUT ISN’T FED POLICY USD BEARISH? – YES…it’s true that the Fed stands by its ultra accommodative monetary policy (net USD bearish), but don’t forget, other central banks around the world have also implimented aggressive accommodation which should be offsetting. Remember, the currency game is a game of relativity. The US government has prescribed an aggressive dose of proponomics to nurse the economy back to health, but so too has the rest of the world. EUR/USD 1.2920 is now the key short-term level to watch below, with a break to confirm bias and accelerate declines towards 1.2800.