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Will Volatility Turn into Major Trend Breaks?

By , Chief Currency Strategist
10 May 2014 03:27 GMT

Last week's volatility originated with EURUSD. Could this be the push the FX markets need to forge a real trend? As the most liquid currency pair in the market - and arguably the most liquid asset in the entire financial system - the move this benchmark has made could prove the shove the currency world needed to reposition - if not on risk then on yield assumptions.

With the ECB-led tumble for the currency, I decided to take half my EURUSD short off (+110) and trail the stop up to breakeven plus 50. If this pair stalls at its channel floor - around 1.3750 - I will book the second half. Regardless of whether it simply continues through that trendline and generates a new bear wave now or later, I see the opportunity in trading the changing tide. I will either add to the existing half I have now or take it anew on the break later.

The euro was generally a big mover this past week, and its tumble would also return my EURAUD short back towards April's lows. Given the hesitation we experienced in this area before, I decided to book half of this position (+225) and trail the stop. However, I still like this pairs big H&S technical pattern and the general outlook for the imbalance in interest rate forecasts between the ECB and RBA.

My other trades consist of the the long-term USDCHF long which broke a significant trendline resistance Friday as the Swiss worked off its Euro relationship - but my view is much longer term. The same is true for my longer view for the AUDNZD long, though a break above 1.09 will mark a progression point. GBPAUD is the last active trade on, and that depends far more on yield forecasts and specifically the BoE's Quarterly Inflation Report.

The upgraded forecasts from the BoE in the week ahead will be critical for maintaining the hefty interest rate expectations that have built up behind the pound. If they falter - which the sterling will be more sensitive to - I will be looking to GBPUSD if it can topple the 1.6750 channel floor.

The other major theme that is on my radar - as always - is risk trends (see the Strategy Video no the risk of bubbles). It will take a serious escalation to put the dollar back on the safe haven path, but in the meantime, there are a number of yen crosses like EURJPY and GBPJPY which have already tentatively made key breaks and are ready for someone to lite the fire.

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10 May 2014 03:27 GMT