The US Dollar Index has finally broken the downtrend over the past couple of months, and it looks like it might have carved out a double bottom right at the 81 support level. While it has undercut the 200-day moving average, this was probably a shakeout move, and I recommend getting ready for a major US dollar rally soon.
After a nice range expansion to the upside to start off September, the DX is now pulling back to both the 20-day and 200-day moving averages, which should provide a very nice risk reward entry point. I think you are risking 80 on the downside, and 100 on the upside longer term, so I really like the setup again on the long side.
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The euro actually broke below the 200-day moving average late last week, but recovered on Friday for the weekly close. We are seeing another rally this week in the euro, bringing it right up to the underside of the 20-day moving average. Obviously, this is the largest driver of the US Dollar Index, so a failure right here around 1.3250 would be a great sign for US dollar bulls. I would watch closely for this rally to fail, and the next test lower probably will not hold the 200-day moving average. Downside to the low 1.20s is clearly back on the table on the next break of the 200-day moving average. Watch out below!
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The other currency market we need to watch very closely is the Japanese yen, especially if I am right about a major wave of risk off coming back into the market. The US dollar has rallied back above the 100 level against the yen, but this is a level that has started to cap USD rallies in the past. While that might not be bullish for the US dollar, a strengthening yen would not be a positive development for risk in general as it could be a signal of carry trades unwinding. This could also stop the Nikkei
(INDEXNIKKEI:NI225) rally in its tracks, as the Japanese equity market has been one of the strongest this year.
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I am very concerned about the risk markets in general over the next few months. The inevitable move higher in interest rates, extended stock markets, and parallels to the 1987 analog model have led me to get very defensive recently. The markets have had a nice run, but I am worried that the risk to equities has shifted dramatically to the downside. Cash just might be king over the balance of 2013. Be careful!
Positions in DX, M6A, M6B, M6E, MCD, MJY, MSF futures.
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