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 Positioning and Technical Outlook: High Noise to Signal Ratio

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PostSubject: Positioning and Technical Outlook: High Noise to Signal Ratio   Sat Feb 16, 2013 10:46 am

The official talk around the G7 statement and the G20 meeting generated a great deal of needless noise in the foreign exchange room. It is almost like a librarian yelling "Quiet". It may be more disruptive than the initial noise.

With the meetings out of the way, we expect the official jawboning about the currency market to die down. Of course, there is a chronic low level murmur of economic commentary that may have broad implications for foreign exchange rates.

Over the course of the past week, the currencies we analyze here, with the exception of the small gain (0.25%) by the Mexican peso, all fell against the US dollar. The Dollar Index (DXY) itself closed above the downtrend drawn of the mid-November highs. The strong close before the weekend drew it near the retracement objective in the 80.70-80 area. The next target would be 81.35 and 82.00.

From a technical point of view it makes sense to put the currencies here in three buckets, the euro, yen and the others. The euro had remained strong even as the yen and the other currencies fell. It has been trending lower since the start of the month. We had thought the $1.3400 area would generally hold, but it has not. Moreover, it appears additional near-term losses are likely.

The 5-day moving average has crossed below the 20-day moving average. The similar trendline that the Dollar Index closed above comes in near $1.3280 in the euro and rises to $1.3320 be the end of the week. A convincing violation suggests scope for addition 1-2 cent decline. On the other hand, the trend line drawn off the early Jan high is near $1.3440 on Monday and falls toward $1.3350 by the end of the week. A move above this trend line will help stabilize the technical tone.

We have argued that the driver for the euro-dollar exchange rate is short-term interest rate differentials. German short-term interest rates have been more volatile than the US and the German 2-year yield has been the key. The Germany two-year yield rose above 30 bp last month and has slipped back below 20 bp. However, it appears to be building a base above 15 bp and we expected caution ahead of the end of next week when European banks can begin paying back funds from LTRO II.

more here: http://nwostop.com/zero-hedge/55201-currency-positioning-and-technical-outlook-high-noise-to-signal-ratio

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