Preparing for Major EURUSD, GBPUSD and AUDCAD Trades for after the Return of Liquidity

With much of the cummulative liquidity in the western world offline Friday; there was very little chance of a meaningful development. However, my focus was set much further out that the final 24 hours of this trading week or even the week ahead. There are a few short-term trade setups out there that can pull in a quick turnaround in the span of 24 to 48 hours; but the profit potential on them is minimal. What's more, the risk associated to these positions is abnormally high given the market's exposure to sharp bursts of volatilty without a reasonable chance to turn that influx in activity into a trend. Instead, I am focusing my efforts on the bigger trades that are just beyond the horizon of the new year. And there are some very interesting trades out there.

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For potentials, there is a range of pairs that I am keeping a close eye on. The most popular of these trades is EURUSD. The short I had on prior to my leaving for vacation hit its first target on Monday and it was a good time to bail out on the remainder of that position later this week. Yet, there is still considerable potential with this pair. The fundamental deterioration behind this pair has not matched its price action; and a reconciliation is no doubt in order. A break below 1.30 will be the first sign to peak my interest. A setup with far greater potential is GBPUSD. The average true range (ATR) on this pair is at its lowest level since late 2007/ early 2008; so a surge in activity is likely. What's more, where the outlook for the UK's economy and markets have deteriorated; the currency really hasn't adjusted to the fundamentals. Though a notable correction back towards 1.59 is possible; I'll wait for a move below 1.53 to jump in a medium-term trade. For the greatest potential for return; AUDCAD tops my list. The reversal for this pair from a six-year high has been delayed by stimulus; but a drop in risk appetite is likely to hit hardest hear. It may look like a double top from 1.02; but it is best to wait for confirmation of a reversal before leveraging up on such a flimsy technical event.

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Other notables on my radar include USDCHF, EURGBP, GBPAUD and NZDJPY. NZDJPY and EURGBP are short-term breakout / range candidates only. The former is working its way into a wedge above 61.60 and the latter is pushing up into resistance around 0.8525/50. USDCHF is a reversal candidate after bouncing back up from 0.95 and testing the stability of a month-long descending trendline around 0.9625. GBPAUD has the capability of a being a very aggressive mover. Having plunged to new lows despite a tepid performance from the Aussie dollar and over-extended tumble from the pound, this pair could be set for a rapid reversal.

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In the meantime, the only exposure on now is a long-term USDJPY long (that is expected to hold well beyond an impending wave of risk aversion) and the reduced-size NZDUSD short (intended to take advantage of distinct technical levels and a lack of conviction for new trends in current market conditions).