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Currency Market: US Dollar Index Holding at Key 79 Support Level


The euro remains the focus of weakness against the US dollar.

The US Dollar Index (DX Futures, (UUP) ETF) has held the critical 79 support level so far, and like I was saying last week, tried to shake out the week hands with a close just below that level last Friday. It is bouncing back nicely early this week, and I still think DX long positions are one of the best risk-reward setups in the markets right now. I would like to see the DX get back above 80 quickly to confirm this 79 support level, but for now I think this is a market that is in the process of turning higher. See the DX chart below.

Click to enlarge

The euro is really the big reason the DX is finding support at 79, as it is rolling over in the low 1.30s and is the largest component in the US Dollar Index. We all know about the issues in Europe, and the euro is really the only currency right now that looks bad technically against the US dollar. For this reason, I have shifted most of my US dollar long exposure from long DX into short euro. Longer term, I think the euro could easily trade back to parity against the US dollar, and shorter term I would look for the downtrend to resume once we break back below 1.30. See the euro chart below.

Click to enlarge

While obviously a lot of my focus has been on the US dollar recently, it helps for diversification purposes to look around for other currency crosses with actionable technical setups. With the recent strength in the Japanese yen, one currency cross I think looks particularly interesting here in the Canadian dollar / Japanese yen cross (CADJPY). The longer-term trend is still clearly down with this cross trading below the 200 day, but I think the shorter-term trend is turning up.

I would look to buy the CADJPY cross below 76, and I think you are risking 75 for a move to 80 or possibly higher. I'll take a 4-to-1 reward to risk trade any day, especially in a cross that won't be as correlated to some of my core US dollar long positions. See the CADJPY chart below.

Click to enlarge

Good luck out there!

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Positions in EUO, Euro futures.
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