Currencies Poised for Short-Term Correction

MORNING SLICES

FUNDYS

Although the G7 has come and gone with no official statement on currencies, the USD is barely moved to only slightly lower against all major currencies on the day, with price action classified more as consolidative.  In Japan, the current account surplus widened for a fifth consecutive month, while loan growth shrank for the second consecutive time since December 2005. Meanwhile, BOJ Yamaguchi was on the wires warning that the local economy would be in a severe condition until Summer or mid-2010.

Relative Performance Versus USD on Monday (As of 9:10GMT) –

1)     CAD                        +0.47%

2)     KIWI                       -0.29%

3)     AUSSIE                  +0.23%

4)     EURO                     +0.23%                  

5)     SWISSIE                +0.22%

6)     STERLING             -0.15%   

7)     YEN                         -0.32%

Elsewhere, Treasury Secretary Geithner was out propping the buck over the weekend after saying that the US would never lose its triple-A status. Geopolitics remains on investor minds after Iranian President Ahmadinejad ordered the start of a higher uranium enrichment for use at a medical research reactor. The commodity currencies have found some bids in the early week on news of the completion of an Australian coal supply deal to China, and well bid gold and oil prices. In the UK, Sterling has been relatively underperforming as new concerns arise over the rising debt in the country, which some have compared to those distressed Eurozone economies. On the data front in Europe, the only key releases were Swiss unemployment which came in a tad stronger than expected, and Eurozone Sentix, which was much weaker.

It will be interesting to see how things play out for the remainder of the day, with the economic calendar in North America not really seen factoring in to price action. The USD is now highly overbought against most major currencies and we would not at all be surprised to see the development of some form of a correction over the coming days.  Looking ahead, the only released schedules in North America comes out of Canada in the form of housing starts (180k expected) due at 13:15GMT. US equity futures point to a higher open, while commodities are also very well bid.

TECHS
 

EUR/USD The 1.3800 objective from the 1.4200-1.4600 consolidation break has now been well exceeded, with the market dropping sharply into the 1.3500’s ahead of the latest minor bounce. While our core view continues to favor additional downside, short-term technical studies are now severely oversold and warrant a much needed and healthy corrective bounce. A break back above 1.3745 would be required to officially trigger a short-term correction, while inability to do so will keep the focus on next downside target by psychological barriers at 1.3500.  

USD/JPY Last Thursday’s violent pullback certainly dents our shift in outlook in which we had been projecting significant upside over the medium-term. However, the market has still not managed to close below 89.00 and it will be interesting to see how things play out from here. In some ways, the recent whipsaw price action makes it a little easier to call. A break back below 88.55 will confirm bearish resumption, while above 91.30 should accelerate gains to the topside and put the constructive outlook back in play. Until then we remain sidelined.

GBP/USD The market has finally taken out the key October lows just over 1.5700 to likely open the door for some medium-term setbacks over the coming weeks. However, daily studies are now looking quite stretched and there is the strong risk for a material corrective bounce before any additional weakness can take place. As such, look for a push back towards the 1.6000 area from where a lower top will carve out ahead of eventual bearish resumption and fresh declines towards critical psychological barriers at 1.5000. A break above 1.5775 is required to take pressure off of downside, while next key short-term support comes in at 1.5500.

USD/CHF The latest break back above 1.0500 suggests that the market has now carved out a major base that exposes some fresh medium-term upside towards 1.1000 over the coming days. However, given the intensity of the run-up over the past few days from 1.0200 through 1.0700, a short-term corrective pullback can not be ruled out. Nevertheless, we would look to use any dips into the 1.0400-1.0500 region as a formidable opportunity to build on existing longs in anticipation of a fresh higher low.
 

FLOWS

German, Middle Eastern, and sovereign demand for Eur/Usd. Technical accounts looking to buy break of 0.8800 in Eur/Gbp. Funds selling Gbp/Jpy into rallies. Spec accounts and leveraged names bidding Gbp/Usd. Local accounts looking to buy Usd/Cad dips. 

TRADE OF THE DAY

Eur/Cad: The cross has pretty much been in decline now for ten consecutive days and daily studies are looking very stretched with the market reaching its lowest levels in two years. Any additional setbacks from here are now seen limited, with the more likely outcome to result in a short- term corrective bounce back above 1.5000. A closer look at the components shows a daily RSI in Eur/Usd well below 30, while the Usd/Cad RSI isn’t even close to 70 at this point. As such, we like the idea of buying into a dip on Monday in anticipation of the anticipated corrective bounce. STRATEGY: BUY @1.4540 FOR AN OPEN OBJECTIVE; STOP 1.4390. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON MONDAY. POSITION SIZE SHOULD BE 3X TOTAL EQUITY.

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 has been created to track our results on a daily basis. We are pleased to announce that our model generated returns of 50% in 2009. The return on equity curve seen below has now been reset for 2010.


 

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.

If you wish to discus this topic or any other feel free to visit our Forum page