Currency Trends Take a Summer Vacation

08/22/2013 9:00 am EST

Focus: CURRENCIES

The currency markets have not been trending very well lately, so it is best to step aside until some clearer trends develop, writes Cody Tafel of Minyanville.com.

The US dollar Index has remained under pressure, and it has not even been able to stabilize at the longer-term support around the 200-day moving average. Even the recent rise in interest rates has not helped the US dollar, and it seems like investors are losing confidence in the safety of the greenback. A break of the June lows would make the pattern over the past six months look more like a broadening top, which is typically a bearish formation. Inflation concerns are coming into focus with the rise in interest rates, and that could keep the US Dollar Index trending lower; therefore, I would look to sell rallies.

This is definitely a frustrating development as I have been a US dollar bull, and the below chart is a classic example of why the markets have presented a difficult environment for trend followers in 2013.

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Even the weakest currencies have started to rally against the US dollar, as evidenced by the British pound breaking above the 200-day moving average for the first time since January. It failed at this level in June, so the fact that it is finally closing above the 200-day moving average for consecutive days is definitely a bullish development for the British pound. It looks like the 1.55 level should be decent support on any pullbacks, and long positions can be entered on a scale-back into the moving averages.

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The Canadian dollar is one of the few currencies still in a longer-term downtrend against the US dollar, and this seems to be the case with most of the commodity currencies. However, shorter-term trends seem to have improved; even the Canadian dollar and New Zealand dollar are starting to act better. The only exception seems to be the Australian dollar, which remains very weak. I would use the weakness in the Canadian dollar to cover short positions more as a function of risk management.

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The currency markets have definitely not been trending very well for us, so it is best to step aside until some clearer trends develop. Unfortunately, it looks like these trends will be bearish for the US dollar.

Positions in DX, M6B, M6E, MCD, MJY futures.

By Cody Tafel, Contributor, Minyanville.com

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