Is Long Gold / Short Euro Unwinding?
The Euro is never boring. While it is not a natural leader -- because it has no carry, and the region is such an economic "slow spot" compared to the West and East -- it is the world's most widely traded financial instrument. Because it is so heavily traded it can appear to be a leading indicator market, which it is not. It is however, a great trading vehicle, as buyers this week can attest to. In our book we teach that long-term structure, or patterns are only relevant when price is in close proximity to them. We bring this up now because the Euro just got within 50 pips or so of its primary pattern 50% level at 1.3160, which held so strong back in September and October. We also mentioned that the Euro is not a leading indicator market, yet over the last 4 months it has easily out distanced the asset class favorites S&P 500 and AUSUSD. So what gives?
A favorite macro trade to take advantage of all the uncertainty in the global economy over the last couple of years has been long gold and short Euro. With gold breaking down and Euro breaking up the last couple of days it looks we are seeing longer-term traders exiting this trade ahead of year end. It is probably one of those trades that we don't need to read too much into because the impetus is more emotion driven than economic --the effect none the less could be large. If the Euro moves on the September high at 131.75, and stops above that level are elected, we could see one more short-squeeze in the Euro -- and the same for a shake out in gold. In the end we would see either or both possible occurrences as opportunities for selling a rally in the Euro.
AUDUSD New Yearly Highs?
The Aussie jumped higher following the Reserve Bank of Australia's rate cut, not doubt buoyed by the first sentence of the 4th paragraph of its rate statement that, "Sentiment in financial markets remains better than it was in mid-year…". And that is a good thing overall. The story in the Aussie heading into the New Year is that China did not slow down in 2012. AUDUSD is a proxy for China and year in year out that has proven to be more supportive than not. We like Aussie and are actually holding out for a new high for 2012, but not without taking out the summer highs around 106.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.