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US Dollar Looks Ready to Run, but Volatility Might Return This Month


The euro has broken back below 1.30, and USDJPY is through 100 on the upside.

The US Dollar Index confirmed the bullish trend is intact by turning higher last week at the key 82 support level, and it now looks poised to make a run very similar to May of last year, which saw the US Dollar Index rally 5% in one month! My initial targets have been the upper 80s at least in the short term; longer term, the US Dollar Index could easily run all the way back to 100. This is why I still really like the risk reward of this trade even after the current bounce off support. On the longer term 10-year chart of the DX below, you can see why the 100 level is within reach.

Click to enlarge

The euro has finally rolled back over from the 1.30 level, and this market really looks like it could crumble now that it is starting to break below the 200-day moving average. There is a very clear head-and-shoulders topping pattern forming over the past nine months, and a close below the 1.28 level could cause a waterfall move down to 1.20, which is the target for the pattern on the downside. I continue to think this trade still has at least 5 to 1 reward to risk even at current levels. See the bearish pattern below.

Click to enlarge

The Japanese yen has obviously been a huge focus for the currency markets, and it is probably one of the clearest trends I have seen in a while. Last week, the widely followed USDJPY cross blew through the psychological 100 level, and it hasn't looked back. These round number levels can really get markets moving once they are cleared, and we could be in the process of seeing this trend accelerate. Obviously you don't want to be on the wrong side of this market, and this could be the start of a full yen crash.

Click to enlarge

I would also like to make sure readers know the implications for commodities and commodity currencies if this US dollar rally is kicking into high gear. The chart of gold looks terrible, and the commodity currencies are starting to accelerate on the downside as well. Stanley Druckenmiller, who is probably one of the greatest macro investors of all time, noted at a conference last week that he thinks the commodity supercycle could be over, and advised shorting the Australian dollar. I would be very careful if you have significant exposure to commodities, and now is the time to aggressively manage risk. Good luck out there and be careful. It looks like volatility could really creep back into the markets in May!
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Positions in DX, M6A, M6B, M6E, MJY, NZD and gold futures and options.
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