Green-Back in Favor As End of Year Chop Begins

MORNING SLICES

FUNDYS
 

We are now in the final weeks of trade for 2009, and as the decade comes to a close, we are starting to see the typical violent intraday end of year price action. The Greenback has come back into favor over the past few weeks, and following the Fed on Wednesday, has now managed to accelerate gains across the board. While the Euro has now taken out barriers below 1.4400 and is very weak in mid-session trade on Thursday, it is the Australian Dollar and British Pound that have been beaten down even worse on the back of some local developments. While the Fed left rates unchanged as expected, the announcement that liquidity measures would expire in February 2010 was taken as a huge USD positive, with a majority of the accelerated USD gains over the past few hours attributed to this development. Also seen influencing price action has been the latest Greece downgrade from S&P.

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

1)    YEN               -0.29%
2)    SWISSE       -0.94%
3)    CAD              -1.03%
4)    KIWI             -1.17%       
5)    EURO            -1.18%
6)    AUSSIE         -1.33%   
7)    STERLING    -1.34%

The relative weakness in the Australian Dollar can be explained by the release of the Monthly RBA Bulletin which revealed that the central bank had booked profits on its Aussie longs and had reverted back to a net Aussie selling pattern. The Australian Dollar is the second worst performing major currency on the day and the relative weakness has also come from reports that some $20B from overseas funds in private equity investment are now at risk because of some new Tax Office interpretations of “tax avoidance.” Meanwhile, Sterling was been beaten down after triggering some stops below 1.6200 following the much weaker than expected UK retail sales data. The firmer subsequent CBI release has also failed to materially bolster the single currency off of its lows. Although the Yen has suffered the least against the buck on Thursday, Japanese Deputy PM Kan has been on the wires welcoming the recent Yen weakness. Elsewhere, comments from PBOC Zhu did not hurt the buck, after the official said that the Greenback would continue to weaken on rising deficits. Finally, Canada CPI has come out firmer than expected and is helping to stall some of the Loonie selling this morning.

Looking ahead, Canadian international security transactions (5.5B expected)are out at 13:30GMT along with US initial jobless claims (465k expected) and continuing claims (5195k expected). US leading indicators (0.7% expected) then follow at 15:00GMT, along with the Philly Fed (16.0 expected), while EIA natural gas data caps things at 15:30GMT. US equity futures point to a lower open, while commodities are also weighed down on similar correlations.

We have talked for some time of a potential shift in global macro market dynamics that might force a situation in which the USD will once again be able to benefit on positive US developments and healthy risk appetite. We contend that the major force behind this shift ultimately stems from the Fed’s monetary policy and the central bank’s willingness to start to introduce a less accommodative policy. The latest move to remove stimulus measures into 2010 could very well be the catalyst needed to force this shift in dynamics and we could now be entering a period in which major US asset classes become more positively correlated.
 

GRAPHIC REWIND
 

TECHS
 

EUR/USD (See below).

USD/JPY Despite the latest bounce, the pair still remains confined to a very strong downtrend and any rallies are seen limited, in favor of a bearish resumption. Look for any additional rallies to stall out by the 100-Day SMA in the 91.00 area, with only a break and close back above 92.35 to delay outlook and give reason for re-think. Key support now comes in by 87.35, and we look for a break back below this level over the coming days to confirm bearish continuation and expose a retest of the recent multi-year lows at 84.80.

GBP/USD The market is currently locked in some bearish consolidation and deeper setbacks are favored towards initial support by the 200-Day SMA over the coming days which coincides with critical psychological barriers at 1.6000.  For now, the key level to watch below comes in by 1.6165, with a break to signal an end to the consolidation and directly expose 1.6000. Below 1.6000 will then expose some medium-term support by 1.5700 further down. Any rallies should now be well capped ahead of 1.6500.

USD/CHF The break back above 1.0340 this week has been a critical development which now greatly increases the likelihood of of a material shift in the structure in favor of additional USD gains over the coming weeks and months. The market has also now broken back above the 100-Day SMA for the first time since May 2009, while the daily RSI is at its highest levels in over a year which further strengthens our core bullish outlook. From here, look for any setbacks to now be very well supported ahead of 1.0200, with the market now seen eyeing a test of next resistance by 1.0700 over the coming days.

FLOWS
 

Heavy across the board USD buying. Local accounts bidding Usd/Cad. Sovereign accounts starting to sell Eur/Usd. US investment house on the offer in Gbp/Usd. Model funds booking profits on long Aussie and Kiwi positions.
 

TRADE OF THE DAY
 

Eur/Usd: While longer-term and medium-term technicals now warn of a major shift in the structure, which favors additional USD gains, shorter-term technicals are officially stretched, with the daily RSI dropping below 30 on Thursday. Remarkably, the daily RSI in the major has not been below 30 since October of 2008. While this development reaffirms the trend shift into the USDs favor, the shorter-term horizon now warns that we could see a bounce over the coming days to allow for some inter-day oversold technical readings to unwind. There is a lot of support from previous daily lows earlier in the year at current levels, but the next key level to watch below comes in by the 200-Day SMA at 1.4175. Nevertheless, the risks from here are for a bounce back towards former support by the 100-Day SMA at 1.4655 before considering a fresh downside extension. POSITION; LONG @1.4355 FOR OPEN OBJECTIVE; STOP 1.4205.

PORTFOLIO OVERVIEW

 

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
If you wish to receive Joel's reports in a more timely fashion, e-mail jskruger@fxcm.com and you will be added to the "distribution" list.

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