The dollar is making a mockery of my contention that trends need corrective periods in order to remain sustainable! This morning EUR/USD, AUD/USD and NZD/USD have made new lows, and the other dollar crosses have turned back strongly in the dollars favour, none more so than the New Zealand dollar which was helped by an unscheduled statement by the Central Bank Governor calling it’s level “unjustified and unsustainable”. Yesterday Prime Minister Abe in Japan made comments about the pace of yen depreciation.. it’s almost enough to make me nostalgic. Currencies are becoming sexy again, and official figures are suddenly starting to comment! Still… this should introduce some caution to USD/JPY buyers, the currency pair has had a huge move over the last 18 months, and if anything it seems to have accelerated in the last few months.. I would advise extreme caution from here.

We can see the same picture – of dollar strength – in the Emerging market currencies, with the Mexican Peso, South African Rand examples of currencies which are challenging their recent weakest levels against the US dollar. Currencies are not the only assets to feel the strength of the dollar, commodities, particularly precious metals have been victims as well, with gold and silver at their weakest for the last few months.

For the purposes of this blog, I’ll focus my attention on the euro, while there’s no question that EUR/USD has consistently demonstrated the most bearish of tendencies, I remain concerned about the quality of this latest move down. The momentum is very weak, and the longer this persists the stronger my belief that a more aggressive correction will be the eventual outcome. I’m willing to stick my neck out and let the markets continue to embarrass me! Don’t get me wrong, I have a very strong conviction that we’re only at the start of a period (possibly multi-year) of dollar strength, I wouldn’t be shocked to see EUR/USD down at 1.20 at the end of the year, but if everyone is getting short, there’ll come a time soon when the marginal buyer will tip the scales the other way, we’ve all seen it before, and the results can be very painful for those who’ve over-extended themselves. We’ll keep monitoring the situation.

The S&P 500 held above the lows as I suspected yesterday, and bounced almost 1% from where it was 24 hours ago. On the data front we have durable goods orders to look forward to in the US this afternoon, and Italian retail sales later this morning. We’ve already seen Eurozone M3 numbers earlier this morning, which showed a slight pick up of this monetary aggregate from the previous month.

I think we’re likely to see more dollar buying this morning, but I maintain that the risk is rising of a sharp and aggressive reversal. In my opinion, the quality of the buying particularly for crosses that have already had substantial moves in recent weeks (EUR and JPY spring to mind) is questionable at these levels. No doubt smart traders are keeping hold of what they have, but not adding. Don’t fight the trend is the name of the game, but always keep in mind where your optimal take profit levels are.