USD is on breakout on many pairs. What is interesting is it is at such thresholds even though it is highly overbought and fundamentally it is difficult to understand why this move has been so dramatic considering the state of the US economy and the ‘Bailout Package’.

One explanation might be the overhead of the ‘Carry Trade’ and the unwinding of many other trades such as in Oil and other commodities that were high flying over the last few months. Remember that even Gold has been softening and gold is usually a flight to commodity in times of economic uncertainty. Also of note is we are at extremes in sentiment indexes that usually signal a reversal. With all of this going when we see a reversal it will be dramatic and add to the roller costar ride we seem to be on in many currencies.

So here’s my take on what we might see next:

Now with some relief on the credit markets, although I don’t believe this will help stem the coming recession it might give some temporary relief. As such this might be the climate required to cause a temporary reversal. I’m not saying there is a bottom in place on the EUR/USD or the GBP/USD, however we should be expecting that when a turn comes it should be dramatic and obvious.

What is usually the best trades during such times is to bet on the JPY. Japan went through a crisis of non-confidence some years ago and as much as their economy relies on world markets as much as everywhere else, they have been cleaning up their financial systems and should weather the storm better then the other G8 economies.

There are many possible counts by Elliott Wave standards and as such I am choosing to view this as a neutral indicator and will be looking for daily candles for clues on where the moves will be. For now, I still view the trend towards USD and JPY strength until a strong reversal takes place.

The EUR/USD has spent weeks in the oversold however the move does not appear over. Waiting for a strong reversal signal is recommended before changing your bias.

The GBP/USD is very much in a similar situation. So I am on the sidelines waiting here to pounce at the right time as well.

The USD/CAD is truly at a critical place. Having broken through both the .618 Fibo of the last major move down and breaking a long-standing trend-line. Much more of a move up strongly suggests the bottom may be in place for some time. Especially if commodities like Gold and Oil continue to soften. (Not to mention potash and copper).

EUR/JPY is a highly volatile pair however if you’re lucky enough to catch a strong downward move, you may consider keeping a small position on for the long haul as an expected a multy year correction is underway and the JPY should continue to strengthen for some time. If you don’t like the stop-losses required on this pair consider the CHF/JPY.

Good trading!