A Potential Last Gasp of Volatility Next Week and an AUDJPY Trade to Pair it With?

There are two sides to the trading coin going into next week. On one side, we know that December (particularly the second half) is historically a quiet time for the speculative markets due to holidays and tax season for a generous segment of the global community. On the other hand, we are carrying over a lot of significant, fundamental risk that has yet to be resolved. At the top of my list of concerns are European financial troubles exacerbated by an Ireland bailout vote, Chinese efforts to curb capital inflow after the strong CPI reading with potential further rate hikes and US efforts to flood the market with stimulus to unstabilize the natural balance in the market. What can we expect from these events? There is certainly the potential for volatility; but that doesn't necessarily mean that we will get follow through. With the broader financial markets looking at a natural lethargy in liquidity, it will be difficult to sustain true trends. I will err on the side of caution with expectaitons of restrained markets. That means, lower position size, offset theme exposure (long risk in one place, short risk in another) and reasonable targets and stops.

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Looking out over the next week, there is significant pontential seen in a number of pairs. For those that I am not currently tracking, it is more about volatility and breakout potential. EURJPY is the most highly charged with congsestion below 111.50/75. A breakout here is the most likely with the mix of European issues as well as the general threat of a sentiment stir. Perhaps the most appealing breakout candidate though is AUDJPY above 82.80 as we don't necessarily need a risk aversion move to get this pair moving higher. NZDJPY can see a bearish channel break below 62; but it would probably be a better candidate should sentiment hold up and that range pattern hold as well. I will be more dubious of the longer-term potential in GBPUSD and AUDNZD. The former is almost purely fundamental until appealing technicals setup but AUDNZD has a great fundamental charge for advance and the technical appeal of a triple top around 1.32.

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For those currently on the book, there was moderate movement on most fronts. The most notable development was EURNZD's tag of its second target at 1.7635. Reasonable targets worked well for this pair. The short EURUSD from 1.33 and long NZDUSD from 0.7450 balance each other out should there be a significant drive in the dollar and/or risk trends come next week. USDCAD is still looking for the second half to hit its target at 1.0185 but a trailed stop pared its risk. And, USDJPY is a long-term setup that has very unique fundamentals. Perhaps the most unilateral risk in the mix is the short AUDCAD short from 0.99. A stop of 150 points is wide for this pair; but the reward potential in a long-term reversal is substantial enough to offset it. That being said, such an outcome requires a trend...