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Currency Market: US Dollar Index Should Start to Roll Over


Most of the major currencies are trending higher against the US dollar.

The US Dollar Index is starting to consolidate just below the 200-day moving average, and given that most major currencies are rallying against the US dollar, it should probably start to roll over at these levels. The 200-day moving average is hovering just above the 81 level, which should cap any near-term rallies. However, I'd probably wait to see confirmation with a break below the 80 level before getting aggressive with bearish US dollar positions. The chart below shows the risk to the downside.

Click to enlarge

The Japanese yen is interesting at current levels as it looks like it's starting to form a base. It should be an interesting trade from the long side at current levels. The yen short has been the "easy" trade over the past year, and it is certainly crowded. A rally in the yen could start a snowball effect in the unwinding of carry trades, which could also pressure global risk markets. I think the Japanese yen is worth a shot on the long side here with a tight stop, as it should provide a nice hedge if risk markets start to weaken. These carry trades sure can unwind quickly when risk starts to come off!

Click to enlarge

The Canadian dollar is one of the few major currencies that looks weak relative to the US dollar and other majors. Short-term momentum has improved slightly, although this has just brought the Canadian dollar up into short-term resistance levels. It should start to roll back over here above the 0.90 level; I would use this strength to initiate short positions with a tight stop. I think the risk is only 100 pips or so to the upside, with favorable reward potential down into the mid 0.80's. Good luck out there!

Click to enlarge
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Positions in MJY, MCD futures.
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