Holiday Trade Kicks Off With Sideways Price Action

MORNING SLICES

FUNDYS
 

Trading activity is sure to lighten up significantly from here until after New Years, with a good chunk of market participants now officially on vacation. While the highly illiquid trade over the next two weeks is sure to produce some intense whipsaw price action, we highly recommend that traders proceed with caution and upgrade risk management practices a few notches.

Relative Performance Versus USD on Monday (As of 8:50GMT) –

1)    YEN               -0.03%
2)    SWISSIE      -0.06%
3)    STERLING    -0.24%
4)    EURO           -0.24%       
5)    CAD              -0.29%
6)    KIWI             -0.52%   
7)    AUSSIE        -0.80%

The Asian and European sessions of trade have been very quiet and we have mostly seen currencies locked in a comfortable consolidation, with some second-tier Japanese, Australian, New Zealand and Swiss data failing to influence price action. While our core view has been net USD bullish against all of the major currencies, with the exception of the Yen, shorter-term technicals are now warning of a potential USD sell-off into the end of year. Nevertheless, our medium-term outlook favors additional USD appreciation, with many currencies only just starting to carve out some very well defined tops.

Some themes that have been developing include the following: 1) The Yen has undergone a fresh round of selling on speculation that the BoJ may look to initiate a more aggressive easing policy after the central bank announced that it would not allow CPI to drop below 0%. 2) The ECB has raised its loss estimates for banks and this has added to pressure on the Euro, with fears of bad bank debt at European banks escalating. 3) The Australian Dollar has come under pressure following a dovish local article which concludes that the RBA jumped the gun with their rate increases. 4) Dubai’s final debt maturity approaches in the final days of December and more uncertainty looms with talk of a potential bankruptcy. 5) Geopolitical risk materializing with unconfirmed rumor of terror attack around December 25. 6) CFTC data shows that IMM USD shorts at a 10-month low in the week ending December 15. 7) PBOC researched says Chinese economy is overheating and inflation will accelerate. 8) Eur/Chf extends declines after closing below critical SNB defended barriers at 1.5000.

Looking ahead, data in the North American session is light, with Canada retail sales (0.8% expected) and the Chicago Fed National Activity Index at 13:30GMT. US equity futures are pointing to a higher open, and commodities are also slightly bid. The Yen is the strongest major currency on the day against the buck, while the Australian Dollar underperforms.

 

GRAPHIC REWIND
 

TECHS
 

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 stretched, with the daily RSI dropping below 30 last Thursday. Remarkably, the daily RSI in the major had 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 1.4190. 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.

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 1.6050, with a break to open a direct retest on 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 1.6400.

USD/CHF The break back above 1.0340 in the previous week has been a critical development which now greatly increases the likelihood 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 has reached 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

Stops below 0.8850 in Eur/Gbp. Leveraged accounts on the offer in Aussie and Kiwi. Model funds looking to buy Eur/Usd; technical accounts waiting for test of 200-Day SMA. Local accounts still looking to buy Usd/Cad.
 

TRADE OF THE DAY

No Trade: We are going to try and stay conservative into the end of year and protect our profits. As such we will only look to establish highly compelling trades.

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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