CAD/JPY: Major Technical Break

We have a major technical break in CAD/JPY this morning. The currency pair has broken below trend line support, the 50-day SMA and the 23.6% Fibonacci retracement of the year to date rally. Next stop could be 81.50. Lower oil prices are playing a big role in the move. Read all about it in my article today Currency Traders: All Eyes on Commodities

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EUR/USD: Downside Projections

Although I am long term bearish dollars, I cannot ignore the fact that the near term outlook for the greenback has changed. Important technical levels (1.40 in the EUR/USD, 1.60 in GBP/USD and 97 in USD/JPY) have been broken and there is a good chance that economic merits rather than risk appetite could be driving the dollar.

The greenback weakened tremendously over a short period of time and was due for a serious bounce. The lack of major U.S. economic data until Wednesday of next week could lead to a further rally in the dollar as the euphoria from the non-farm payrolls report lingers over the currency market. I have been both short and long term dollar bearish since the beginning of May and even though my views on reserve diversification have not changed, it may be better for traders to wait and rebuild those dollar shorts at higher levels. I believe that the sharp rise in bond yields is a combination of stronger investor confidence and concern about U.S. public finances.

Since the beginning of 2008, there have been numerous “corrections” preceding strong rallies in the EUR/USD ranging anywhere from 3.5 to 6 percent. From this week’s high of 1.4340, a 3.5 percent correction would take the EUR/USD down to 1.3840 while a 6 percent correction would take the currency pair down to 1.3480.

Source: Bloomberg

Source: Bloomberg

Forex Pairs Break Key Levels

The U.S. dollar has weakened significantly driving many of the major currencies to the highest level in months. Here’s a table illustrating the significance of today’s moves. I expect at least another 2 percent decline in the U.S. dollar against the key currencies (Short and Long Term Outlook for U.S. Dollar).

The fact that USD/JPY is not participating in today’s rally indicates that investors’ distaste for dollars rather than their risk appetite is driving the dollar lower. The modest gains in Dow futures and the sharp rise in gold prices confirm that investors are bailing out of dollars. In my interview with Fox Business 2 days ago, I talked about how the one takeaway from the concern about the credit worthiness of the U.S. is the need for diversification.

Yesterday, a Brazilian official said that the BRIC nations (Brazil, Russia, India and China) could take unilateral action to reduce their dependency of dollars at their summit next month. Brazil has already begun to replace the dollar bilaterally in their trade with China and unfortunately this trend could continue with other nations following suit in the coming weeks and months. The one thing that the financial crisis has taught investors large and small is need for diversification and no one wants to sit with baskets full of dollars waiting for S&P to make an announcement. Sovereign Wealth Funds are taking this to heart which could create a fresh supply of dollars.

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Australian Dollar Opportunities

I have been VERY bullish the Australian dollar over the past month. When I was in Asia, I appeared on CNBC twice to talk about how the AUD/USD was poised for further gains (CNBC Interview 1, CNBC Interview 2). At that time, the AUD/USD was trading at 71 cents. Now that the pair has exploded, the opportunities are starting to become a bit more limited. I still think that the AUD/USD is headed to 78 and possibly 80 cents, but Monday’s high of 7715 could prove to be tough resistance.

Australia stands to benefit from both a U.S. and Chinese recovery. The Chinese government has previously said they are looking to increase their investments abroad and Australian commodities have long been an attractive investment for the Chinese. A growing nation has growing resource needs and the previous decline in commodity prices has encouraged China to add to their stockpiles at current levels. Australia is a big copper producer and Chinese demand for copper should remain strong thanks to their stimulus spending. Last month, the Australian labor market reported positive job growth which confirms my overall belief that when the dust settles, Australia will be first to rise from the ashes. Yes, the budget deficit is expected to hit record levels, but that is a problem that plagues all major economies.

With that in mind, I have my eye on EUR/AUD. This pair has a higher spread and is more volatile, but there is scope for a move down to 1.75. I’ve been bearish this pair since 1.85, and now the 1.80 level will serve as resistance.

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