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March 10th, 2013 at 8:27 am

Commodity Dollars and the Yen.

The commodity currencies made some interesting news recently. A little later this year, the IMF will expand its list of foreign exchange reserves with the Australian Dollar and the Canadian Dollar. Chances are that by the end of 2013 the New Zealand Dollar will also join that list. This database is known as “COFER” (composition of foreign exchange reserves) and reflects what governments around the world hold in their respective reserves.

It is probably time to include these currencies to the list. After all, both the Aussie and the Loonie have been under accumulation by foreign governments for some time now. In case on the AUD, it is believed a part of foreign reserve portfolio of as many as 34 central banks around the world. By some estimates, foreigners hold as much as 80% of Australian federal securities, steadily accumulating them since 2009.

While on the subject of the commodity currencies, they are all showing interesting chart patterns in relation to the Japanese Yen. These instruments recovered losses from two weeks ago and climbed to new highs for the trend. In addition, their daily charts also show divergence with the MACD indicator, a relatively rare occurrence on this time scale. It is worth a closer look since a proper divergence often is a high probability trade set up.

In case of the AUD-JPY, the daily chart shows a well-defined divergence with the MACD indicator. On Friday, the price made a new high for the trend, reaching 99.01, before pulling back some. Unfortunately, even though we have the basic premise of a divergence trade, there is no sell signal yet. The price action did not form a bearish candlestick reversal pattern. Had the price closed another 15-20 pips lower, we would have had a shooting star. As is, the chart shows, well, nothing. It needs to develop another bearish pattern in order to confirm the divergence and suggests a larger correction.

The CAD-JPY shows a slightly different picture. Here the MACD is also significantly behind the price action, pointing towards a divergence. However, this instrument has not made a new high yet, thus negating the divergence. It still could happen, but the CAD-JPY must climb above 94.50, reaching a new extreme for the move. Only at that point, the technical picture will be in line with a possible top. That does not mean that the CAD-JPY cannot move lower from here – it easily might, but this particular correction would not show the MACD divergence.

The NZD-JPY, on the other hand, made a new high on Friday, touching 79.77. This formed a divergence with the MACD. In addition, the price pulled back significantly in late trading, showing a shooting star in the process. It is important to understand that these formations do not necessarily “forecast” reversals but increase chances for a corrective move. For the NZD-JPY, this translates to a likely pullback to about 77.40/50, with the risk at the high, or about 90 pips, if there is no significant gap at the opening. I plan to simply short it at the start of trading and see what happens. It might make more sense to use smaller time frames in order to pinpoint entries and exits, something I will attempt to do in other JPY pairs. Unfortunately, due to pending commitments, I will have no time to update the blog until probably Thursday, maybe Wednesday, so that is why this trade in the NZD-JPY is the only one discussed here. Have a great trading week!

Mike K.

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