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The FXCM Dollar Index exploded higher Friday and traded to levels not seen since July of 2010 on the back of the improving US employment picture in the US. Given the index was also able to take out some key resistance at 10,850/90 (78.6% retracement of the 2010 to 2011 decline and the 61.8% retracement of the 2009 to2001 decline) it should signal that a broader USD move higher is underway and indeed we think it has. However, on several metrics we monitor (like rate-of-change) the index is showing signs of getting severely overextended. This dovetails with some of our shorter-term focused cyclical work which is pointing to an intermediate-term high forming sometime next week. While we don’t usually like to fade such strong trends, the cyclical outlook does look pretty clear and it looks worth taking a punt if the right risk to reward profile is achieved. As such, we like selling against 11,130 if it gets there. This level is the 161.8% extension of the June decline and marks a clear potential short-term stopping point if it is seen during the turn window slated around the middle of the week.
USD/CAD Daily Chart: July 5, 2013
Charts Created using Marketscope – Prepared by Kristian Kerr
Key Event Risk Next Week:
Source: DailyFX Calendar
LEVELS TO WATCH
Resistance: 11,000 (Psychological), 11,130 (Fibonacci)
Support: 10,890(Fibonacci), 10,855 (Fibonacci)
STRATEGY – Sell FXCM Dollar Index next week at 11,130
Stop: 1-day close above 11,130
Target 1: 11,070
Target 2: 11,000
--- Written by Kristian Kerr, Senior Currency Strategist for DailyFX.com
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