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Currency Market: US Dollar Index Is Best Risk-Reward Trading Setup


Flight to safety will benefit the US dollar, plus trading patterns for the euro and Australian dollar.

The US Dollar Index is making a good effort at clearing resistance around the 80 level, and the weakness in the euro has certainly helped. Commodity currencies have also started to roll over, as the weak jobs number last Friday has clearly put the market back in "risk-off" mode. It seems like a lot of markets are trading around key levels, so it is interesting to see the various trading setups as we start off a new quarter.

In general, I would say a lot of these setups are of the bearish variety, which might make some sense with the bullish start we have had to the year. This potential flight to safety should benefit the US dollar, and I still think this is one of the best risk-reward trading setups in the markets. As you can see in the below chart, DX is currently trading just above 80, and I think you are risking 78 for 90 on the upside. I'll take 5-to-1 reward to risk any day.

Click to enlarge

The euro got hit last week and is now just above the 1.30 level, which is the neckline of a somewhat unorthodox head-and-shoulders pattern. I say this because the right side of the pattern is slightly higher than the left, which is not very common, but this pattern is occurring just below a descending 200-day moving average, so a resolution to the downside should not be a surprise. A close below 1.30 would open the door to additional downside in the euro to the 1.25 level. See the pattern below.

Click to enlarge

The Australian dollar has been trading in a descending channel and downward trend for almost a month now, and this has clearly diverged against a broader equity index like the S&P 500. This commodity currency is very closely linked to the Chinese economy, and weaker-than-expected numbers there recently have helped keep the Aussie under pressure. Now trading below the 200-day moving average, the Aussie looks like a decent short on rallies above 1.03, with 1.04 resistance offering a nice risk-reward setup considering downside easily to the mid 0.90s. See the chart below.

Click to enlarge

Be careful out there as it seems like the second quarter could get off to a rough start. The S&P 500 is breaking the 1375 support level today, 10-year yields have already rallied back below the 2% level (I was clearly wrong there short term), and copper is convincingly breaking the 200-day moving average and trading at the lowest level since January. The risk-off trade is probably a little oversold here, but keep in mind after such a good start to the year, further downside could still be in the cards. Good luck!
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