A Bumpy Ride for Currencies

07/18/2013 9:00 am EST

Focus: CURRENCIES

The US dollar is pulling back below 83, and it needs to turn higher soon to confirm an uptrend, writes Cody Tafel of Minyanville.com.

The high volatility in the currency markets continues to dominate trading, as the US dollar plunged last week following the Fed minutes and Ben Bernanke’s comments. After again failing to break out through the 84-85 level, the DX is pulling back below 83 again, and this should provide an attractive entry point for long positions with a tight stop. This has certainly been a frustrating market over the past few months for a trend follower. You can see in the below chart how the DX has been forming a broadening pattern since the start of April. Usually this type of action precedes even more volatility, so we will need to keep a close eye on the US Dollar Index as it could really drive trading during the second half of this year.

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The euro continues to frustrate short sellers, and just when it looked like it was about to break down again, the effect of Bernanke’s comments on the dollar helped the euro rally right back above the 200-day moving average. So far, it has pushed right through this resistance, and it looks like the max pain trade for the shorts is back on. I would have to move to the sidelines again on my bearish view on the euro if it is able to push through 1.32, but the longer-term chart still looks troubling. We’ll see which way this one breaks.

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One emerging market currency caught my eye this week; I think the Mexican peso looks like it could be setting up for an interesting risk reward short trade. After getting hit hard in May and June, the peso has rallied right back to the 50% retracement of that decline at the .079 level. That also happens to coincide with the 200-day moving average, and momentum still looks to be weak in this market.

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I would use this rally to establish a short position, as I think that at current levels, you are risking 100 pips to the upside while it could easily move back down 500 pips or more. 5 to 1 reward to risk works for me!

By Cody Tafel, Contributor, Minyanville.com

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