What I took out of last week were three things:
1) Euro selling appears to have abated
2) No reason to short the dollar
3) Traders really don’t want to be in either the Euro or Dollar and would much rather be buying stocks, commodities, or higher yielding currencies
Regarding the Euro: When you strip away the headlines of eight month lows in the EURUSD and nine year lows of the EURAUD, we had the euro trading higher last week against both the pound and yen. I am not saying it’s time to “back up the truck” into the Euro, but the markets seem to be telling us that there are other damaged goods out there that can replace the Euro. Based on this assessment, I would be surprised to see another round of lows for the EURUSD, and see it holding around the 1.35-1.38 mark for a few weeks. Something tells me that whoever was selling it has sold it, and if you weren’t a seller after the FED’s move last week, you probably aren’t going to be selling it now.
The Greenback: What I liked about last week is that we saw the dollar moving higher even though equities and commodities also have a good week. It’s true that they usually weren’t always moving up on the same days, but it appears that traders aren’t necessarily swapping one for another. Basically, my thought on the dollar is that US fundamentals are improving, but the real reason for the dollar’s strength in my opinion is the added rotation of European institutional investors, funds, banks (whatever you want to call the guys with lots and lots of spare cash) that appear to be parking their funds in dollars until the dust settles in Europe.
Long term though, I think the problems surrounding the dollar are huge, and inflation, rising deficits, continuing job losses (forget about job growth, people are still getting fired) will limit the dollar’s power. However, there is enough flowing into the dollar’s direction over the short term, that shorting the dollar is a little risky.
Risk Appetite: Whether you call it yield buying, risk appetite buying or plain and simple Speculation, the moves higher in stocks, gold, oil, the Aussie, and Aiwi tell me that traders aren’t looking to be defensive. They want to make money, and 0.25% interest rates just don’t cut it. Therefore, I will be cautiously looking for momentum in these areas, and look to buy if we trade above last week’s highs. This is the theory behind my AUDUSD long trade. I don’t trade Gold, but if I did, I would be buying now as it has traded above 1126, and looks poised to run up to the 1140 levels.
That’s my take, for whatever its worth.
Disclosure: Open orders for AUDUSD buy position