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FX Trading – A whole lot of cleansing going on …

Yesterday it looked as though the bottom was going to come out from under the euro and the Australian dollar. But when the US session opened up and stocks made new highs, well, the euro and Australian dollar were dragged higher too.

Today, though, maybe the bottom is coming out … of everything.

We mentioned this idea in passing on Friday when we put together the weekly audio/visual summary:

As the QE2 story becomes overused and the technical patterns approach stopping points, the major currencies had seemingly been kept afloat only by stronger US stocks – there appeared little conviction among FX traders even as the currencies reached new highs last week.

Copper is sharply lower today (4-hour chart):

Gold is too (4-hour chart):

The British pound:

The Australian dollar:

The “correction” is upon us. Almost everyone is viewing this as only a correction; hmmm …

US Dollar Index 4-hour:

US Dollar Index Daily:

The 78 level is in the books. We’ve recently put a target on 79 and then 80, based on Fibonacci retracements.

The moves today are clearing out a lot of ground very fast – at time of writing:

GBPUSD -1.15%
EURUSD -0.95%
AUDUSD -1.69%
NZDUSD -1.34%
USDCHF +1.52%
USDCAD +1.58%

These are big moves. Maybe a correction only, as most people think, but let’s stay open to the idea there could be more to this than meets the eye given the curious timing between the Treasury and China.

If there is a real credit bubble problem in China, and we think there is given the huge level of foreign exchange reserves as we talked about in the CCPRO Monthly for October, raising interest rates and letting the yuan appreciate are two sides of the same coin; it will dampen growth near-term and reduce the size of FX reserves. Reallocation of that expected growing bucket of reserves makes up a lot of the premium priced into the euro and yen and commodity dollars. If this expectation changes on recent action, the so-called dollar “correction” could surprise.

CNYUSD Daily versus AUDUSD Daily versus EURUSD Daily: