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US Dollar Index Continuing to Trend Higher, Commodity Currencies Holding Up


The US Dollar Index remains strong, but commodity currencies are relatively outperforming.

The US Dollar Index has continued to trend higher starting off 2012, mainly because of the euro weakness as that currency makes new 52-week lows. With short positions at new highs in the euro, we will want to keep a careful eye out for a countertrend rally at some point soon, as that could provide us with another opportunity to add US Dollar long exposure on a pullback toward the 80 support level. It probably makes sense for the US Dollar Index to consolidate for a little while to digest the recent gains, so set your alerts now, and if you see the US Dollar Index back below, 80 it is time to start buying aggressively again. See the weekly chart below with the 200-week moving average just below 80.

Click to enlarge

I was wrong last week about the commodity currencies rolling over, and have been stopped out of my Canadian dollar short position. It looked to me like the Canadian would sell off, but instead it has held up and rallied with the other commodity currencies, which have started to relatively outperform the US dollar. Traders must manage risk and cut losses short, and this is what I am doing with the Canadian dollar right now. However, we should keep a close eye on these commodity currencies here as they are approaching resistance levels. For example, see the chart of the Australian dollar below. The Australian dollar is rallying into 200-day moving average resistance from below. A failure here could lead to another downside test.

Click to enlarge

I was also wrong about selling gold short last week, and have not started off my 2012 calls very well. However, to be a successful trader, you have to always take trade setups when you can quantify the risk-reward in your favor, and always admit when you are wrong! The market can be a cruel teacher if and when you do not follow your trading rules. I stopped out of my gold short and went back to the long side late last week as gold popped above 1650 and then pulled back into 200-day moving average support. I will stay long gold for now with a stop around 1600, as it looks like this longer term uptrend is reasserting itself. As you can see in the below chart, it is looking like gold might have formed a double bottom here with 1550 holding, and a move to new highs would see gold approaching the psychological $2,000 level. It is interesting how the US Dollar Index and gold have rallied in tandem, breaking the historical negative correlation between these assets.

Click to enlarge

One last idea which triggered late last week: As I mentioned in my 2011 end-of-year wrap-up, crude oil holds in very well, and is probably one of the best-looking charts right now. I really like the risk-reward of long positions below $100, and I bought crude oil on the pullback below that level late last week. I think it should remain support and would add on any pullbacks. Good luck out there!

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Position in EUO, GBP futures, gold futures, crude oil futures.
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