As I mentioned last week, the US Dollar Index continues to be very frustrating for trend traders, and I don’t think I’ve had a good call in this market since early in the year. The Fed really put the nail in the coffin last week, and the US Dollar Index smashed through the last support level around 81. The DX has bounced slightly after setting new three-month lows on that event, and I would use this bounce and anything above 81 as an opportunity to sell the US dollar. The risk is skewed back to the downside now, with the door open to the mid 70s on this recent breakdown. Time to give up the bullish case on the USD!
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The euro blew through the 1.34 level last week on the Fed news, and even pushed above 1.35 for a little bit before settling back down to just below 1.35 currently. The price action must be respected here jsut as much as this euro strength makes zero sense. It does seem like investors are starting to find value opportunities in Europe now, and maybe the US dollar weakness is just increasing the capital flow to what I thought would be a very troubled currency this year. Time to admit I am wrong and move on!
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The Japanese yen continues to hold in relatively well against the US dollar, and I had been worried that this could be an early warning signal for risk in general. While the initial move after the Fed news has been partially reversed, I think this currency should continue to be watched closely as further strength could really catch a lot of people off-sides in this trade. The long Nikkei
(INDEXNIKKEI:NI225) / short yen trade has worked very well this year, to the point it might be one of the more crowded trades at the moment. The market has a way of creating the maximum amount of pain for the most people possible! A big yen rally and carry trade unwind would not be a welcome event for risk into year end.
Be careful out there!
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Positions in MJY, DX futures and options.
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