This text is from blog famous currency strategist Joel Kruger .
HARSH REALITIES – Once again, as much as I would like to see EUR/USD trade lower from here, I am still holding no short position and would not rule out the possibility for additional upside at this point towards 1.3500 over the coming sessions. Markets have a funny way of pushing and pushing into year end, and given the latest daily close over 1.3200, it looks as though that push could very well be to the upside. The 2012 high from February resides just under 1.3500 at 1.3486, and the longer the Euro stays bid, the more likely that traders start to realistically target this level.
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REVERSAL REQUIREMENTS – Still, daily studies are now overbought, and should EUR/USD fail to establish a weekly close above 1.3200, we could just as easily see the playing out of the bearish resumption that I have been looking for. The key short-term level to watch below comes in at 1.3140, and a break below will go a long way to help alleviate immediate topside pressures. Though the Euro price action is classic end of year behavior, fundamentally, investors have been using their expectations for a fiscal cliff resolution, and ultra dovish Fed monetary policy as the excuse to drive the Euro higher.
CORRELATION BREAKDOWN – Interestingly enough, there has been a notable divergence on the commodity bloc, with Aussie, Kiwi and Cad failing to participate in this latest Euro rally. While many of the other major currencies have taken the Euro’s cue, extending gains against the US Dollar, commodity bloc FX has actually been moving in the opposite direction. The heavy setbacks in gold prices on Tuesday have certainly been a factor, while a lengthy longer-term relative outperformance in these currencies could also be finally catching up. This is a welcome development from my end, as I remain aggressively commodity FX bearish.
LOOK AT THOSE YEN CROSSES – As far as short-term price action is concerned, it will be very hard to get me involved in the markets over the course of the next few weeks. I am never a fan of trading in thin and highly unpredictable market conditions, unless of course markets are screaming to take action. That being said, if there are markets that would be candidates for such screaming attention at the moment, they would have to be the Yen crosses. The recent declines in the Yen and concurrent broad based sell-off in the US Dollar has resulted in some wild Yen cross price action, with these markets racing into overbought territory.
SHORT-TERM EXHAUSTION – EUR/JPY has just broken to a fresh 2012 high after taking out the March peak, and with the daily RSI now tracking above 80, it would be very hard to see gains extend much further before a sizable corrective retreat. A bearish reversal day on Monday was violently negated in Tuesday trade, and with many stops on the short side likely being cleared on that move, the timing could be ripe for a short-term counter-trend play. If we weren’t in the final weeks of trade for the year, I would be jumping all over this one, but for any of you brave ones out there, this could offer an attractive risk/reward opportunity. Fundamentally, there is very little reason to be wanting to long Yen, but technically, the charts are oozing with short-term trend exhaustion.
