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In my last Friday afternoon chart review, Italian bond yields had closed back above 7% for the week and the EURUSD breached a significant technical level, further supporting the case for deeper declines in the EURUSD. 

This past week, despite improvements in European bond yields, we ended the week with an S&P downgrade across euro zone countries, including France, Spain and Italy. 

With that U.S. yields fell back toward record low levels and the dollar index broke out to a 16-month high – as capital from around the world plowed into the relative safety of US treasuries and the US currency. 

Heading into next week, while the euro and the pound have been the favored currencies to sell in recent weeks, the technical and fundamental landscape suggests the heavier selling interest could turn toward other currencies – my favored shorts:  the Japanese yen, the Swiss franc and the Australian dollar.

EURUSD

Last week, I said things were set up for more selling of the vulnerable euro. 

The long term descending channel in the EURUSD that has broken (the white channel in the above), continued to confirm more, sustained weakness ahead for the EURUSD.  In the seven trading sessions, we've had five closes below the channel, one close right around the bottom channel line and then on Friday we got another close below the channel, after making a lower low -- clearly bearish.

Moreover, on Friday, the EURUSD broke below the double bottom that was marked on Wednesday, opening up further downside targets.

This weekly chart shows the next key support for the euro in the low 1.25 area.

This 1.25 level is where many bearish forecasts had projected the EURUSD by the end of Q1 -- but just two weeks into the New Year, the EURUSD is already threatening to see that level.

Beyond that, the 2010 low of 1.1877 comes in as the next key level ... and then 1.1213, the 61.8% retracement of the move from the all-time low in the EURUSD of 0.8230 to the all time high of 1.6038.

However, we can see here, the euro short position continues to be very crowded -- the biggest extreme short on record.  That should be enough to turn traders attention elsewhere for a bit, which should keep the EURUSD, back and forth, in the mid 1.20s for a while, unless/until a shock event (like a default) occurs.

GBPUSD

Chart of the pound here ... we took out a prior low today of 1.5270 ... now the next big level is 1.5150.the long term trendline.

USDJPY

In USDJPY, the long term trendline now comes in around 77.80 – which would represent, a big break point, breaking a long term downtrend dating back to the 2007 high. 

I expect USDJPY will have its day.  With the dollar index breaking out, and given Friday’s broad dollar strength, that included a sharp spike in USDJPY, it looks like USDJPY might finally be ready to move.

AUDUSD

The Aussie is in a long term wedge pattern here (denoted by the red and white lines) ...

These highs in the 1.0385-90 area contained the move higher this week.  We would need to see a break above that level and then a breach of the 200-day moving average (1.0413) to threaten the near-term downside bias.  Considerable interest in recent weeks by the hedge fund community to sell EURAUD has kept the AUDUSD somewhat propped up.  But the outlook for AUDUSD remains clearly to the downside, especially given the pressure on the euro and global stability. 

Look for this 1.0225 area (the green line) to break next, and then the 0.9940 area (the white line) is where the long term trendline support resides.  Aussie still represents among the most attractive currencies to sell in this environment.  I expect the market focus to turn to selling AUDUSD.

USDCHF

With SNB chief Hildebrand's surprise resignation this week, speculators are going after the 1.20 floor for EURCHF -- challenging the resolve of the post-Hildebrand regime to defend that level.

With that, EURCHF goes out this past week at the lowest level (1.2075) since September of last year, when the SNB shocked the market by establishing a floor for eurchf, which consequently took it from 1.10 to 1.22 in a day.

Recent speculation over the past month has been that the SNB would be raising it to 1.35 – but now it appears that the SNB will have to defend its initial level of 1.20 as soon as next week.

That could offer support to the euro and trigger a definitive breakout in USDCHF (chart above).  USDCHF finishes the weekly sharply reversing losses from Thursday and trading back near 11 month highs.

This chart below shows the topside opportunity in USDCHF on an absolute basis.  The last time the EURUSD was under the gun to this degree, USDCHF was trading closer to 1.20.

USDCHF currently trades 0.9525 -- but its rise from the bottom on a percentage basis (see below) has already outpaced the euro crisis driven move of 2009-2010.  It’s moved 35% from the lows, versus an 18% move trough to peak in 2009-2010.  But at these levels the Swiss franc is wildly overvalued versus the dollar.

Dollar Index

Finally this chart of the dollar index …

We tested and failed to breakout yesterday, and then reversed sharply to break to new 16-month highs.  In this chart you can see theopportunity for the dollar to run up to the prior highs of 2009 and 2010.

Of course the long term cycles, as we've looked at, support this case.  The cycles argue we're in a bull cycle for the dollar.  And relative to the amplitude of prior cycles, we should have a lot of potential to the upside (see last analysis on the dollar for reference). 

Regards,

Bryan Rich | fxtraderprofessional.com

January 13, 2012, 4:00 EST