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Pending Long EUR/AUD and USD/CAD, Short AUD/USD and EUR/GBP

Pending Long EUR/AUD and USD/CAD, Short AUD/USD and EUR/GBP

2011-10-26 13:20:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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The Euro-zone summit today has been the main driver of risk-appetite the past three-weeks; with the summit concluding, there is to be expected a 'pop' in higher-yielding and risk-correlated currencies coupled with a steep sell-off in the safe haven currencies. Nevertheless, I remain highly bearish given the significant fundamental structural issues that remain and will likely remain in place for months. Until these issues are addressed - mainly being the excess liquidity in the system that when withdrawn will likely lead to a market crash (credit is overextended and unwarranted: the natural business cycle has been disrupted) - I remain long-term bearish.

Accordingly, these trade setups are predicated on the notion that markets are winding up into a pattern similar to late 2008, on a fundamental and technical basis. Fundamentally, there is chatter about a bank recapitalization for the top 50 banks which are deemed "systemically" crucial. These European banks will be recapitalized with the European Financial Stability Fund, a vehicle that draws comparisons to the Troubled Asset Relief Program employed in the United States in late 2008. Even though banks were recapitalized, it should be noted that equity markets did not bottom until March 2009, nearly 5-months after TARP was instated. My outlook for the EFSF and markets is of the same outcome.

With that said, the trades on the table which have not been initialized but remain within their timeframes and within their bearish formations.

Long EUR/AUD

- Entry: Long at 1.3640 [above Moving Average Confluence Zone]

- Stop: 1.3407 [61.8 Fibo] (233-pips)

- Target 1 (Reward/Risk Ratio): 1.3775 [Last Week's High] (135/233, 0.58)

- Target 2: 1.3827 [23.6 Fibo] (187/233, 0.80)

- Target 3: 1.4030 [Range Top] (390/233, 1.67)

- Timeframe: 2-weeks

Long USD/CAD

- Entry: Long at 1.0369 [sub-wave a of wave 4]

- Stop: Stop to 1.0234

- Target 1(Reward/Risk Ratio): 1.0657 [termination of wave 3, weekly high] (288/135, 2.13)

- Target 2: 1.0854 [projected termination of wave 5] (485/135, 3.59)

- Timeframe: 2-weeks

Short AUD/USD

- Entry: Short at 0.9845 [38.2 Fibo]

- Stop: 1.0046 [23.6 Fibo] (201-pips)

- Target 1(Reward/Risk Ratio): 0.9683 [50.0 Fibo] (162/201, 0.81)

- Target 2: 0.9521 [61.8 Fibo] (324/201, 1.61)

- Target 3: 0.9386 [October low] (459/201, 2.28)

- Timeframe: 3-weeks

Short EUR/GBP

- ENTERED: Short at 0.8690 [below 20-DMA]

- Stop: 0.8794 [Double/Triple Top] (104-pips)

- Target 1 (Reward/Risk Ratio): 0.8600 (90/104, 0.87)

- Target 2: 0.8523 [76.4 Fibo] (167/104, 1.61)

- Target 3: 0.8465 [Range Bottom] (225/104, 2.16)

- Timeframe: 2-weeks

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