This text is from blog famous currency strategist Joel Kruger .
THE POWER OF 1.2800 – The Euro remains under pressure into Thursday, and it will be interesting to see if that key 1.2800, October 1 low, can be taken out. I would say that a break and close below 1.2800 would be a very bearish sign and could open the door for an acceleration and eventual decline all the way back down to the yearly low from July, just over 1.2000. As already highlighted in Wednesday’s briefing, a break and close below 1.2800 would not only have bearish implications for EUR/USD, but would also extend to the currency market in general, with the risk correlated commodity bloc and emerging market FX the most vulnerable to weakness against the US Dollar. US equities would also be at risk for material declines, and the latest S&P break below 1430 could already be quite telling, with a double top now triggered on the daily chart.
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SOMETHING IN THE AIR – I am not exactly sure why, but some days you just have a feel that the markets could be a little wilder than usual. For some reason, Thursday feels like it could be one of those days. Perhaps the focus on the Euro and latest equity slide could be contributing factors, while USD/JPY’s break back under 78.00 can also not be ignored. As far as the crosses are concerned, I like the idea of taking advantage of the latest dip in EUR/CHF below 1.2100, and also feel there could be good opportunity to pick up EUR/AUD at attractive levels in the 1.2400′s. A lot of you sent me that link to the WSJ article about Goldman calling EUR/AUD long the “Trade of the Century,” and all I can say is that is nice to see that others are also waking up to the idea. It also feels pretty good that we were able to get in at such great levels (thanks for the emails 🙂 ).
NOT AN ENDORSEMENT – Moving on, the metals haven’t move much at all, but with gold and silver, I am also anticipating some short-term weakness, and we could very well see these markets pull back more aggressively over the coming sessions. I guess with currencies, equities, and commodities all potentially at risk, it actually makes sense that a hard rain is gonna fall. My broader outlook has been quite medium-term bearish on currencies, equities and commodities (short-term bearish on commodities), and I keep coming back to the fact that it just doesn’t feel right that US equities have recently traded to just 10% off of their record highs from 2007. We are still a good ways away from legitimate global economic recovery, and although the coordinated round of government proponomics has prevented additional stress, it should by no means be construed as an endorsement of risk correlated assets.
HEALTHY CORRECTION…THAT’S ALL – The US Dollar should be the prime beneficiary going forward as risk off trade dominates and phase three of the global crisis intensifies in China. Right now, the only question is, what is the best currency to buy USDs against? It is always funny just how fickle markets can be. Only a few months back in July, it seemed like everyone was calling for a EUR/USD drop to parity, but now that the Euro has rallied back above 1.300 in recent sessions, no one will even consider the possibility of renewed EUR/USD weakness back towards 1.2000. The market seldom moves in exclusively in one direction, and participants need to wake up to the reality that the recovery from July was nothing more than a healthy corrective bounce within a more well defined and very intact bullish USD trend.