By: Kevin Sollitt
Gold hit a new high again today (yawn) and given the lack of follow-through in other markets to support the main theory that higher gold will drive the USD lower, we are becoming very wary of a breakout in the USD.
Not to say that we are ruling out a period of catch-up, which would mean EUR at around 1.5250 if the correlation were to return. However as mentioned over the past few days, we prefer to see the market as overly skewed in its short Dollar positions and long precious metals positions and are looking at ways to profit from this view if we are correct.
The first clue of the day to support our view that the market is becoming a little nervous holding short Dollar positions at any cost came courtesy of Mr. Bernanke himself who informed us that the Fed “will keep an eye on the Dollar.”
This is hardly news as monetary policy has to formulate at least some small part of monetary policy, What’s perhaps more interesting is that comments on the currency are normally reserved for the Treasury, so to us this statement could be either a complete red herring and nothing more than a passing comment or perhaps as we strongly suspect, a not-so-veiled message to the market that lines in the sand are being approached or even crossed.
To support this theory further we looked at the market’s reaction to the comments, seeing EUR/USD plummet by almost a 100 pips from the 1.4970 area to 1.4880. The EUR has recovered all its losses (at time of writing) based on a very uncertain market and the fact that Bernanke also said that the Fed would keep rates low. Tricky.
However the market had plenty of opportunity to rise on the back of Gold and did not, this tells us that the comfort level of holding EUR is dwindling. Add into the mix that the twice-tested 1.5050 region refused to give way, the US economic numbers are not that bad (Retail Sales +1.4% vs. +0.9% exp) and that EUR has not convincingly extended beyond its point of initial descent, maybe just enough to take out the day traders who sold on the news.
We therefore feel it’s time to start looking at the downside potential for this pair and towards the topside for the Dollar in general.
Indeed, if tomorrow’s crucial PPI and Industrial numbers show any signs of life, which could be quite likely with a weak dollar aiding the manufacturing side of the economy, the USD could be set for a nice gain.
Trade idea: Sell 1 unit EUR at market 1.4980, another at 1.5045, stop-loss for both at 1.5110. Target 1.4440. Risk/reward approximately 5:1
Good trading,
Correlations Continue to Break Down- Is There a Major Breakout Looming?
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