This text is from blog famous currency strategist Joel Kruger .
WILD AND CRAZY TIMES – Things have gotten more than a little out of hand over the past couple of sessions, and may just get even crazier. Any signs that the Fed had been less dovish than markets had been pricing (previous week’s Minutes), have been more than offset by a plethora of USD bearish developments. Initially, it was the Goldilocks US NFP report last Friday that gave USD bears and risk sentiment a nice little prop, after the data showed an upward revision to the unemployment rate, thereby keeping alive prospects for additional monetary easing measures. And then, over the past couple of sessions came the real hard-hitting blows, with some super impressive (though I am still highly skeptical) China trade data, and a borderline hawkish (much more upbeat than anticipated) European Central Bank policy decision, seriously damaging the US Dollar, while at the same time propelling the S&P to the multi-month high from September.
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THIS ONE I JUST CAN’T BELIEVE! – The S&P is now just about 10% off the record highs from 2007! I still have a very hard time digesting this, particularly in light of the fact that a good deal of this rally has been driven less on fundamentals (in my opinion) and more on the lure of ultra accommodative monetary policy. Still, it is worth noting, despite Thursday’s explosive rally in EUR/USD, the market continues to trade within a range and has yet to establish above key resistance around the 1.3300 barrier. This is by no means an endorsement for a EUR/USD short position, but at the same time, it is also something to be aware of. The commodity bloc currencies have also been very well bid in response to these USD bearish events, but here too, there is some formidable resistance that has yet to be overcome.
NOT RUNNING AWAY JUST YET – AUD/USD 1.0600, NZD/USD 0.8500, and to a lesser extent USD/CAD 0.9800, have all found solid renewed USD interest (on recent tests), and despite this latest burst, it remains to be seen whether real USD bearish momentum can be established. At this point, it is certainly a reality that needs to be considered, but on the other hand, longer-term cyclical studies continue to warn of some major topping in the commodity bloc against the buck. Personally, I have expressed my bias through a longer-term, macro AUD/USD short position, and will be seriously discouraged should this market put in a close above 1.0700. Yet with all of the excitement already discussed, nothing can top the type of movement we have seen in the Yen over the past few weeks.
FREE FALLING – The currency has been in an absolute free-fall across the board, and USD/JPY now contemplates a test of psychological barriers at 90.00, that very few thought would be tested this quickly. Mr. Abe has backed himself into a real corner now, and it will be interesting to see if we get any comments that attempt to curb the Yen sales. Technically, short-term readings have gone parabolic, and as scary as it may seem to be, with hourly, daily and weekly studies all violently overextended, an intense corrective pullback could be just around the corner. Earlier this week I recommended taking a shot intraday on a break above 88.00, and while the short-term trade worked out nicely for a time, the market was quick to handle the distraction and get right back on course for a push to fresh highs. Yet, as unconventional as it might end up looking (one top a lot higher than the other), I am still projecting another topside failure towards 90.00, that produces a double top-like formation, opening a sharp decline back to the 85.00 area.
GREAT DEFENSE – Finally, it would be unfair to end this piece without some mention of one of my favorite trades, which is once again showing some real promise. EUR/CHF is back on the move, and looks like it could be poised for a retest and break of some critical resistance from September at 1.2185. My hat goes off to the SNB for really sticking its neck out there and to this point, having managed a super successful currency intervention. Surely there will be many chaps over there breathing a lot easier following the latest break back over 1.2100. The central bank has pumped boat loads of cash into this trade, and for the time being, look to be winning the battle.
LOOKING AHEAD – It seems as though everywhere one turns, there is another central bank with some serious issues on its plate, and the global currency war is really starting to heat up. But even with the USD now backed into a difficult corner, I still retain a constructive outlook and would not count the buck out just yet. Fed Chair Bernanke will be attending the University of Michigan next week for a discussion on Fed policy, and I suspect the event could prove to be an even bigger deal now that currencies are really on the move. We have been invited to join the conversation on Twitter at #fordschoolbernanke. Have a great weekend and please be careful out there.
