Curreny Longs Caught in Nasty Bull Trap

MORNING SLICES

Bull Trap -  "A false signal indicating that a declining trend has reversed and is heading upwards when, in fact, the security will continue to decline. "

FUNDYS

Quite a session of trade in Europe, with many market participants feeling the burn of the nasty whipsaw price action. Initially, it appeared as though we could be on the verge of seeing a fresh wave of corrective upside in currencies, with the break back above the 10-Day SMA in Eur/Usd triggering a wave of currency buying just ahead of the European open. However, after ascending just shy of 1.3700, renewed selling pressure kicked in, with the pair reverse course sharply to trade back below 1.3600 and to fresh daily lows.

Relative Performance Versus USD on Tuesday (As of 9:40GMT) –

1)    YEN               +0.16%
2)    AUSSIE         -0.11%
3)    CAD               -0.16%
4)    EURO            -0.19%       
5)    KIWI              -0.27%
6)    SWISSIE       -0.35%   
7)    STERLING     -0.47%

A softer than expected German IFO certainly did not help the Euro’s cause, but it seemed as though there were larger forces at play in the global macro markets which helped to dampen any renewed investor risk appetite. Sterling weakness could not be ignored, with the single currency getting whacked hard on the back of some UK bearish comments out from BOE King, who saw continued risk of deleveraging in the financial sector, while also embracing and welcoming the current weakness in the local currency. BOE Miles then contributed to yet another round of Sterling sales after saying that it now be necessary to expand QE at future meetings.

Of all the Sterling pairs, it was Sterling/Aussie that stood out the most, with the market dropping to a 25-year low. Some overnight comments from RBA Battellino helped to keep the cross well offered early on, after the central banker was quite optimistic on his outlook for the economy. The comments were directly opposite to those heard from King and Miles, with Battellino also adding that he saw the Aussie rate heading higher on continued investment in the local economy. Swissie was also in the spotlight on Tuesday with some early selling against the Euro generating fresh talk of SNB intervention in which the central bank declined to comment on.

Looking ahead, Case-Shiller house prices (146.3 expected) is dues at 14:00GMT, followed by consumer confidence (55.0 expected), and Richmond Fed manufacturing (2 expected) at 15:00GMT. On the official circuit, Fed Bullard is slated to speak at 22:00GMT on regulatory reform in Richmond. US equity futures have taken a turn for the worse and now point to a lower open, while commodities have also reversed with oil leading the sell-off.  
 

GRAPHIC REWIND

TECHS
 

EUR/USD The break below 1.3530 last Thursday now marks an end to the latest consolidation and opens a fresh downside extension that ultimately exposes a drop towards 1.3000 over the coming days. Next key short-term support comes in by 1.3420-50, and we look for a test of this level over the coming sessions. Daily studies are however looking stretched, so we would prefer to recommend looking to sell into rallies, rather than selling downside breaks. Look for a fresh lower top to carve out below 1.3840, ahead of the next downside extension. 

USD/JPY Has finally ended the latest bout of consolidation with the market breaking back above key short-term resistance at 91.25 to now open the door for fresh upside over the coming days. The break back above 91.25 now completely negates the violent single-day pullback from a couple of weeks back and potentially exposes a direct retest of next key resistance by 93.75 further up. Any intraday setbacks should be well propped ahead of 90.00.  

GBP/USD The break below 1.5535 last Thursday now marks an end to the latest consolidation and opens a fresh downside extension that ultimately exposes a drop towards 1.5000 over the coming days. Next key short-term support comes in by 1.5295-1.5350, and we look for a test of this level over the coming sessions. Daily studies are however looking stretched, so we would prefer to recommend looking to sell into rallies, rather than selling downside breaks. Look for a fresh lower top to carve out below 1.5815, ideally by the 10-Day SMA, which currently resides by 1.5600.   

USD/CHF Continues to press higher with the market now fast approaching our 1.1000 objective from a few weeks back. A major base looks to be firmly in place and any setbacks are expected to be well supported ahead of 1.0600 in favor of a bullish continuation through 1.1000 and towards 1.1500 further up.  Daily studies are starting to look stretched so we do not rule out the possibility for a short-term pullback towards 1.0650-1.0700. 
 

FLOWS
 

Asian reserve manager and semi-official accounts on the bid in Eur/Usd. Model and system funds caught booking some profits on short Gbp/Aud positions.

TRADE OF THE DAY

Gbp/Aud: A fresh 25-Year low now puts the monthly RSI below 30, and at current levels, a major upside correction is sure to unfold. Shorter-term and medium-term technical studies also confirm the need for a bounce, which at a minimum should produce a 10 big figure jump back towards 1.8000. The projected ATR low for the cross comes in by 1.7050 on Tuesday, and as such, we will look to take advantage of the current dip to establish a very playable counter-trend position. STRATEGY: BUY @1.7055 FOR AN OPEN OBJECTIVE; STOP 1.6925. POSITION SIZE SHOULD BE 3X EQUITY. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON TUESDAY.

PORTFOLIO OVERVIEW
 

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