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Currency Market: US Dollar Index Still Looks Like Good Risk Reward on the Long Side


The euro and the yen are looking great short.

I didn't even need to update the headline from my last article, as the markets have pretty much just chopped around for the past week. Anyone who reads my stuff regularly should know that I have been a US dollar bull for a while, and I continue to think the risk reward of long positions in the US Dollar Index is very favorable. The euro is attempting to bounce off support near the 1.30 level, but right now I think it is just a matter of time until this support breaks and the euro trades right down to 1.25. This should get the US Dollar Index rally up strongly through the key 80 level we have been talking about for months now, and will confirm the next leg higher is underway. See the DX setup below...

Click to enlarge

The euro looks like a great short, but the commodity currencies have also been rolling over as economic numbers around the world (and especially China) have come in weaker than expected recently. As I have mentioned, the Australian dollar is just starting to break down, and shorting AUDUSD is an interesting way to play the China slowdown. Rates in Australia have room to come down, and the Australian dollar has rallied back up into the 1.04-1.05 resistance area. There is probably a little more room to run higher, but above 1.05 I would definitely be an aggressive seller of Australian dollars. See the chart below...

Click to enlarge

The one development in currencies I wanted to highlight over the past week is regarding the Japanese yen. The yen has rallied into resistance, and I think now offers another great opportunity to get short this market. The 80 level on the USDJPY is almost a perfect 50% retracement of the US dollar rally against the Japanese yen so far this year, and I think the market is giving us a nice opportunity to get back in to the trend higher in USDJPY. See the support zone for USDJPY around 80 below...time to start scaling back into Japanese yen short positions!

Click to enlarge

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Positions: Yen futures, EURUSD, AUDUSD, USDJPY, CADJPY.
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