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Currency Markets: US Dollar Index Facing Further Downside


The yen is turning higher, which could be the start of a big move up.

The US Dollar Index has failed just below the 200-day moving average and is now breaking back below the psychological 80 level today. It now looks like the US Dollar Index is tracing out a head-and-shoulders pattern over the past 18 months; a close below the 79 level would open the door lower to a target projection of 73. So there's clearly further downside here for the US dollar, and rallies should be sold.

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The Japanese yen is turning higher from the support levels I cited last week, and I think this could just be the start of a big move higher for the yen and an unwind of carry trades. The Nikkei 225 Index (INDEXNIKKEI:NI225) has already broken back below the 200-day moving average, and I believe the Japanese yen is not far behind. As I mentioned last week, this has been an easy market to short, and it sure seems like everyone is still on the short side. That usually doesn't end well. I think will add fuel to this Japanese yen rally fire!

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The Canadian dollar didn't fail at resistance like I thought it would, and therefore I have been stopped out of this trade. It still doesn't act well relative to other major currencies against the US dollar, but risk management must prevail; I'll head to the sidelines for now. Just sharing the process, and hopefully we'll find some more interesting currency setups in the months ahead -- it seems like volatility is creeping back into the markets. Good luck out there....

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Author holds position in MJY futures.
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