morning slices

Currencies Attempt to Mount Recovery Ahead of Event Risk

Once again, it seems as though any data released overnight has failed to factor into price action, with the markets much more focused on the broader, critical theme of sentiment and risk appetite. Tuesday’s less severe close in US equities was taken as a very positive sign into Wednesday with market participants once again looking to build on risk led positions and renew selling of the USD.

MORNING SLICES

Fundys – Once again, it seems as though any data released overnight has failed to factor into price action, with the markets much more focused on the broader, critical theme of sentiment and risk appetite. Tuesday’s less severe close in US equities was taken as a very positive sign into Wednesday with market participants once again looking to build on risk led positions and renew selling of the USD. With the exception of the Yen, which was also hammered on a desire to trade back into risk, all currencies were higher against the greenback in Asia and Europe. While Eurozone PPI and PMI were broadly in-line with consensus, UK PMI was slightly better and German PMI was slightly weaker. Gold was also very much in the headlines overnight with the commodity surging to record highs above $1090, to inch closer to the psychological barriers at 1100. In Sweden, the Riksbank minutes were released and showed that members remained split on the policy outlook. Governor Ingves was in the camp that felt that the current economic environment continued to warrant an expansionary monetary policy.   

Relative Performance Versus USD on Wednesday (As of 12:00GMT) –

1)    STERLING    +0.49%
2)    AUSSIE         +0.47%
3)    KIWI              +0.44%
4)    CAD               +0.42%       
5)    EURO            +0.24%
6)    SWISSIE       +0.18%   
7)    YEN               -0.46%

The relative strength of the Australian Dollar continues to be a headline grabber. Lower equities, a less hawkish RBA, downbeat comments from Treasurer Swan and a much weaker than expected retail sales report have all happened this week and yet the Australian Dollar remains well bid and even higher on the week against the USD. While the yield differential is attractive, we are somewhat baffled with the price action in the single currency which simply refuses to accept any form of a correction. There has been a lot of talk about an inevitable push towards parity in Aussie/Dollar and perhaps this in conjunction with an attractive yield differential and hopes that the global recovery is here to stay have all helped to keep the currency well bid. Nevertheless, both shorter-term technicals and fundamentals would suggest that the market has more room to drop and while we will not fight the strong up-trend (Aud/Usd), we certainly will stay away from buying what we believe to be a very vulnerable currency. We suspect that the single currency, which seemingly is able to rally on anything, will find some fresh bids today after US equities closed only slightly lower, and Warren Buffet said that he was going “all-in” on the US economy after purchasing Burlington Northern for $34B. Also seen propping the mighty Australian Dollar has been the surge in gold prices.

It is worth noting that the Euro has once again failed to close below the 50-Day SMA which has predominantly supported the uptrend in 2009. A close below the 50-Day will now be required to force a material shift in the construct of the market. Volatility is expected to pick up into the latter half of the week, with the FOMC later today, the BoE and ECB on Thursday, and NFPs on Friday. Looking ahead to the North American morning, challenger job cuts are due at 12:30GMT, followed by ADP employment (-200k expected) at 13:15GMT, and ISM non-manufacturing (51.5 expected) at 15:00GMT. The much anticipated FOMC rate decision follows in the afternoon at 19:15GMT. While no change to the 0.25% rate is expected, all eyes will be keenly focused on the accompanying statement for hints at future direction of monetary policy.

Graphic Rewind -

 
Techs - EUR/USD The market has now entered a period of consolidation which we contend to be a bearish consolidation in light of the reversal on the weekly chart. Any rallies should now be very well capped ahead of 1.4860, with a downside break now favored towards initial support by 1.4480. However, we would caution bears at current levels after the market once again failed to establish a close below the 50-Day SMA on Tuesday, which has supported a great deal of the uptrend in 2009. A close below the 50-Day would be viewed as a significant development with the price action suggesting a material shift in the medium-term structure, while failure to do so will keep the bullish structure intact and open the door for a potential resumption of the broader up-trend back above 1.5000. USD/JPY The latest rally has stalled out just shy of our initial objective at 92.55 with the market initially well capped by the bottom of the Ichimoku cloud. Daily studies do however still show plenty of room to run, and we maintain our constructive outlook since the pair based out by 88.00. A higher low is now sought above 89.00, to be confirmed on an eventual break back above 92.55. Back under 89.00 however, will negate and put pressure on downside with market participants eying a retest of the critical 87.15 matched trend lows from 2008 and 2009. GBP/USD Is in the process of consolidating the heavy setbacks seen on 23Oct after failing by formidable internal range resistance in the 1.6700 area. Any recovery rallies are now expected to be well capped in the 1.6500-6600’s, with a lower top sought out ahead of a fresh downside extension through next key support at 1.6240.  Monday’s downside break encourages after ending a sequence of consecutive daily higher lows. USD/CHF The market is attempting to recover after posting fresh 2009 lows by 1.0030 and just shy of parity on 23Oct. While the overriding trend is still intensely bearish, we like the idea of looking to buy at current levels, with both shorter-term and medium-term studies showing the need for a healthy rebound. The recent break back above 1.0230 is really encouraging with the market putting in a strong bullish reversal signal. Look for setbacks to now be well supported ahead of 1.0200 in favor of a fresh upside extension back towards 1.0500 over the coming sessions.
 
Flows – Asian sovereign accounts buying Eur/Usd.  Model funds bidding Aud/Usd aggressively; semi-official offers. Short-term specs looking to buy USDs across the board on dips. System funds on the bid in Usd/Jpy.

Trade of the Day – Eur/Aud: We like the idea of attempting to establish a long position on the cross should the market be able to recover off of the sub-1.6300 Wednesday lows. The weekly chart is very compelling and shows the market in the process of potentially carving out a major base. A bullish hammer close two-weeks back was followed by a strong bullish reversal candle in the previous week, which has ended a sequence of consecutive weekly lower highs. If the market can manage a recovery into the US session back above 1.6300, we will look to buy a  break back above 1.6350. STRATEGY: BUY @1.6355 FOR AN OPEN OBJECTIVE; STOP 1.6240. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON WEDNESDAY. POSITION SIZE WILL EQUAL 3X EQUITY.    

P&L Update and Overview: Many of you have been asking for a way to better track trading results and open positions. In response to these requests and in an effort to be fully transparent, a simulated portfolio was created in June to track and mirror all recommendations and trades. Below is a return on equity curve since inception on June 1, 2009, along with an open and closed position tracker. I am hopeful that this will make things easier for you all.
 

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com
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