Last week, the US dollar came under heavy selling pressure after President Barack Obama proposed new rules and tighter controls to rein in the risks taken by large financial institutions. However, I think the US dollar will recover during this week in a clear “buy the rumor, sell the news” type of trade. Indeed, the Obama administration is taking the defeat in the Massachusetts senate race very seriously and I believe financial markets did not fully discount a possible shift on the president’s policies from left to the center in order to appeal to the independent voter. More importantly, in 2010, the resumption of economic growth in the United States is likely to trigger a change in expectations for inflation and possibly influence the Federal Reserve monetary policy. Eventually, a widening of the interest rate differential between the United States and Japan or Europe will help the US dollar. Good luck!

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The NZDUSD decline has extended into 5 waves therefore a pullback is expected.  Resistance begins at 7240 and extends to 7310.  To begin the week, I like small long positions against 7085.  Set a limit to take profit at 7250.

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The US dollar has staged significant breakouts across the majors, and if you are not already long the currency, it may be worthwhile to look for opportunities to do so. For example, NZDUSD broke below its 100 SMA and a falling trendline connecting the Oct. 21 and Nov. 16 highs, the Jan. 8 lows, and the Jan. 21 highs. In an effort to get the best price possible, I’m looking to sell NZDUSD on another test of that trendline, which coincides with the 38.2% fib of 0.7444-0.7093 at 0.7200/25. Potential targets include the Dec. 23 low of 0.6971 (0.7000) and the 200 SMA at 0.6794 (0.6800). I will likely base my stop on a close above the 100 SMA at 0.7247.

One factor that could make or break this trade is the Reserve Bank of New Zealand’s rate decision on January 27. While no rate change is expected, the central bank’s policy statement has the potential to impact market expectations for future decisions, and thus, the New Zealand dollar.

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The markets are off to a slow start this week. For the market to gather its barings after the level of mometum and volatility we witnessed last week isn’t unusual. What we need to discern is whether this tepid pullback is a sign that the market’s have truly stalled or whether this is a temporary break in a much larger trend. My own take on the market is that there are a few key market reversals that are permanent through the near-term. The Dow’s break from its two-month congestion pattern (though it had a modest bias to it) is a clear sign from a straightforward investor asset class that the steady build up in risk appetite has stalled and there isn’t enough loose capital around to hold the overextended risk premiums up. I think this vote against risk appetite has spread through all the asset classes and it will specifcially benefit those currencies that have been used to fund carry positions. This means a bullish trend for the US dollar and Japanese yen for as long as risk aversion holds.

For positions this week, I’m highlighting two of the existing positions I have carried over from last week. My view on the US dollar facilitates my setup in EURUSD. I entered that pair on the break of its rising trend channel. The recent pullback is to be expected - many breakouts see retracements before moving onto continuation trends. The same technical pattern holds with my EURGBP short from 0.8790. While this pair doesn’t have the benefit of an undervalued funding currency; I believe the perception of risk between the two currencies is shifting and it will prove fair value on the exchange rate is much lower than its current holding. Another setup that I am looking at this morning is USDCAD. Like all other dollar-based pairs, this major has pushed in the dollar’s favor aggressively this past week. The potential for a break is still there with my sentiments on the dollar holding true to this pair as well. Using this pair as a partial hedge to my long dollar exposure (and using the fundamental similarities between Canada and the US), I’ll look for a confirmed close below the falling trendline that began back on 8/17 and now stands at 1.06. However, should we see a clear break of this level, I will stop out at a loss and establish a long position without second guessing it.

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USDJPY broke below support in the 90.21 – 90.57 congestion region after putting in a Dark Cloud Cover bearish reversal candlestick formation at the top of a falling channel that has been guiding the pair lower since April 2009. The fundamental outlook also looks supportive. I will enter short from here (actual short entry taken at 90.14), initially targeting the November swing bottom at 86.28. A stop-loss will be activated on a daily close above 91.89.

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The EUR/GBP failure to break above resistance at 0.8795 the 38.2% Fibo of 0.9031- 0.8650 keeps the current bearish trend intact and opens the door for a re-test of 0.8650-1/20 low. The expected positive U.K. GDP report should help fuel bullish sterling sentiment as it will officially signal an end to the country’s recession. The BoE is expected to bring an end to its asset purchase program with inflation well above their target level and confirmation of growth will add to the hawkish outlook. A break below the support level will expose 0.8523-8/18 low.

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Following up with the CAD/JPY trade from the previous week, the pair slipped to a low of 84.83 on Friday, which triggered my target at 85.81, and I will wait for additional confirmation before looking to take another trade. Nevertheless, the loonie-yen has bounced back overnight and crossed back above the 200-Day SMA (85.13), but the lack of momentum to push back above the 50-Day SMA at 85.80 may lead the pair to retrace the advance from December.

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A multi-day bearish consolidation has been broken, and more importantly, the market has finally broken below the 200-Day SMA to highlight what we contend to be a significant shift in the broader structure, which now favors additional USD strength over the medium-term. The consolidation high-lows had been roughly defined between 1.4200-1.4600, and we therefore look for the current down-leg to extend into the 1.3800’s over the coming days. However, given the extent of the latest drop, we would not rule out the possibility for a short-term corrective bounce towards 1.4250-1.4300 before considering bear trend resumption. Friday’s bullish reversal day reaffirms our short-term bullish outlook, but any rallies towards 1.4300 should be sold. STRATEGY: SELL @1.4260 FOR AN OPEN OBJECTIVE, STOP @1.4420. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5pm ET) ON MONDAY. 3X LEVERAGED.

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