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Currency Market: US Dollar Index Starting to Consolidate Above 80


The US Dollar Index still offers a nice risk/reward upside trade, especially below 80.

The US Dollar Index (DX Futures – (UUP) ETF) has rallied nicely over the past 6 weeks, and now seems to be entering a consolidation phase here just above this important 80 level I have been talking about for a while.

This trend is still clearly higher, and I still like the risk/reward setup of long DX positions, especially below 80. As you can see in the DX weekly chart below, the 200-week moving average at 79 should offer good support on any pullbacks. This trade will have huge implications for the markets as we head into 2012, as I think we could be starting a whole new bull market for the US dollar, which would have negative implications for risk in general. Equities will have a tough headwind to start off the next year, not only with the intermarket weight of the DX, but also with today's rally right into resistance.

Click to enlarge

As I mentioned last week (see Currency Market: US Dollar Index Continues to Trend Higher), commodity currencies have been especially hard hit recently with this US dollar rally, and I wanted to highlight the Australian Dollar (AUDUSD cross – (FXA) ETF) this week. The Australian dollar is having a nice rally into resistance today, and getting close to levels where I think you can safely short it again. Any slowdown in China will obviously have negative implications for Australia, and if the commodity trade in general remains under pressure, the Australian dollar should start to roll back over back above the par level. As you can see in the below weekly AUDUSD chart, the risk/reward looks attractive again on the short side around 1.01, as the 200-week moving average down around 0.90 looks like a potential target for the first half of 2012.

Click to enlarge

The British Pound (GBPUSD cross – (FXB) ETF) also looks like a great short here to me, especially on this rally into resistance today. The 1.57 level should be pretty solid resistance for the pound, and for the technicians out there, you can probably see a head-and-shoulders top pattern forming. Notice how the top failed right at the 200-day moving average around 1.61, and the neckline is forming between 1.5450 and 1.55. If we see another close below the 1.55 level, I think we could see a swift move down below 1.50 to satisfy the 1.49 target for this pattern. Chart below. Trade accordingly!

Click to enlarge

Happy Holidays to everyone, and here's to a happy and healthy 2012! Good luck!

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