As written in one of my previous posts, I thought the USD would break the symmetrical triangle and head lower, but instead it has managed to stay within it and moved up. This is why I have turned very bullish on the dollar in the short term, and I believe the rally still has legs. The greenback has been so strong that it has even gained against the Japanese yen. In the meantime, sovereign debt, especially on the longer end, has continued to sell off as worries regarding the European debt crisis intensified. Ireland officially received its bailout package today, yet the euro weakened once again. This is classic "good news, bad price action!" In terms of equities, the Nikkei, led by higher USD/JPY, and the S&P, benefitting from a stronger dollar, have outperformed stocks in Europe and emerging markets.
What can you expect in the short term? Unfortunately, I believe the trend should continue as the "King Dollar" is poised to strengthen further against its counterparts while equities in Japan and the U.S. will continue to outperform as risk aversion and carry trade reversal continue to unfold. Therefore, I am buying the dollar and selling everything else. As a pair trade, I recommend selling short Europe and emerging markets while buying Japan and U.S. as hedges.
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