While there is much anticipation of a U.S. Dollar rally it cannot start in earnest until U.S. interest rates turn back higher. And that won't happen with U.S. Treasuries moving higher - there is an inverse relationship between Treasury prices and interest rate they yield. The U.S. Dollar will not rally until the U.S. 10-year Treasury Notes turns lower, i.e. : interest rates move higher, making the chart in Figure 1 the most important in financial markets today. The rally in Treasuries creates what we call negative interference for a Dollar rally / Euro down-move.

(click to enlarge)
Figure 1. U.S. Ten Year Treasury Futures

We are in a long line of traders in wanting to add to longs in the U.S. Dollar - Euro shorts -- but we do not think that should be done until the current short covering rally in Treasuries has run its course. If the 10's - pictured in Figure 1 - have another point to go on the upside then the Euro likely will too.

From a longer-term perspective however we think the risk in currencies for U.S. Dollar bulls now is in missing the turn, and feel investors should already have a long cash position. For margined positions however the timing is more important because of the risk, and we favor selling a rally in Euro on the approach to 1.3750. A turn lower for U.S. Treasuries however, would shift us into a more aggressive stance.

Jay Norris teaches trading at Trading-University

Trading involves risk of loss and is not suitable for all investors.

Disclosure: I am long UUP.

Themes: Daily Forex Market Report for 1/14/14 Stocks: FXE