These Are The Most Compelling Longs

Our stance to not chase the reflation currencies mentioned above has proven to
be a wise choice, however, this pull-back may offer some good long set-ups as we
move forward. The commitment of traders report still indicated a solid build up
of short dollar positions. With oil flowing again in Iraq and the forthcoming
Republican Convention, these short dollar positions may be tested. If they
continue to perform poorly the pull-back may be more prolonged as stops are hit.
For now, it is a day-by-day observation to observe reasonable risk/reward
trades.

This comments from the FX Desk at RBS was rather interesting;

“The decline in the oil price seems to have been the trigger for the decline in
EUR/USD, even though the rise in the oil price didn’t obviously contribute to
the EUR/USD rise. In reality, both look to be the result of position unwinding
rather than any fundamental change in the underlying story. If the lower oil
price helps anything, it should help equities and consequently the JPY, the rest
of Asia, and possibly the AUD. The dollar has not been a beneficiary of equity
strength in the last few months, and shouldn’t be expected to benefit from
equity strength now. However, inasmuch as a lower oil price is perceived to
increase the potential for Fed tightening in September, the dollar is likely to
benefit. So far, the impact on US rates has been comparatively modest, but the
unwinding of positions may not be over yet, and there is little reason to expect
a reversal of the USD strength of the last couple of days. A minor bounce in EUR/USD
may be seen, but with most of the decline down to position squaring, and
comparatively few short term long USD positions in the market, the re is little
reason to expect a major USD reversal today.”

One trade mentioned in yesterday’s column was the short of GBP/USD if the
neckline on the daily
chart was broken. Those that took that short trade should place a stop loss at
1.8320. It will likely be a bumpy ride lower as we head towards Labor Day, but
baring any unforeseen news items, the momentum seems to be with us so far.

In another pair that seems poised for lower levels after a pull-back, the USD/CAD
suffered the least of the reflation currencies. BOC Governor was on the wire in
the early day saying oil prices would keep inflation somewhat higher for the
rest of the year and the output gap at mid-year is smaller than previously
thought. Governor David Longworth also indicated the government’s intention to
raise interest rates. Look for moves into the 1.3055-1.3075 level to act as
resistance on short-term models.

Technical Points:

The reflation currencies still offer the most compelling longs over the near
term, the recent sell-off should allow for some good long entries. Watch these
levels in the days ahead.

USD/CAD: 1.3055-1.3075, 1.2960, 1.3012

NZD/USD: .6535-.6572 (many stops rumored in this area)

Cycles on the NZD/USD also suggest that September 1st should signify a trend
change. If this pull-back persists and levels off, it will be one more piece to
add to the puzzle.

AUD/USD: .7065, .7100 as possible supports in this sell-off. The AUD/USD
also shows September 1 as a key reversal date based on cycles.