By: Elliot Turner
Today the Euro broke down from that bear flag pattern highlighted here last week. Relativity is an important concept in assessing currency valuations. It seems at this point that the Dollar’s strength is being fueled more by weakness in the Euro than by strength in the dollar. Although U.S. monetary and fiscal policy remain aggressive, the contraction of leverage in the private sector, combined with a deteriorating situation in the Eurozone adds up to a relatively strong looking dollar. Couple that with the Dollar’s status as the world’s primary reserve currency and we have another catalyst for dollar strength.
Since a large portion of the latest leg down in the Euro happened over the long weekend for U.S. traders, I would prefer to wait for a backtest of the bear flag before adding to my initial short position.
Using the UUP as a proxy, we can see that the dollar is making a bull flag at this point; however, while the Euro has broken down from its flag, the dollar has not yet broken out. A Dollar breakout from this bull flag might provide another chance to establish a currency position–above $23 in the UUP looks like a good level.
I will continue to follow developments in currency markets as they are important indicators of macroeconomic developments. Additionally, with the abundance of ETFs as trading vehicles, currency opportunities offer yet another tool in the arsenal of an equities trader.
