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A Lull in Liquidity Means a Lull in Volatility, Position Accordingly

A Lull in Liquidity Means a Lull in Volatility, Position Accordingly

2010-05-28 19:53:00
John Kicklighter, Chief Currency Strategist
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I wasn't expecting much from Friday in the way of price action as we were heading into an extended holiday weekend for US and British traders. While the exchanges in New York and London were technically open, there were plenty of deep pockets that were likely absent from the pool. This left us with little liquidity and little in the way of scheduled event risk to work worth. So, it was unlikely we would see anything in the way of significant price action. In this scenario, you are likely to see a simple retrace of any significant drives from the previous 24 hours. Obviously, we had a big surge in risk appetite Thursday; so the scene was set. As for trading, this period of congestion or erratic and short-lived breakouts would offer little to trade on (for me at least). Therefore, I simply carried over my existing positions. Looking ahead to next week, the markets could start with a trickle as US and UK liquidity will be absent. However, from there, we have a torrent of scheduled event risk, a G-20 meeting and a precedence for high volatility. The probabilities of good trades developing in this mix are high. Recapping the positions I am still sitting on. I am still short half of my original EURGBP short position (having taken the first half off for profit at around 0.8450) and well in the money. I would prefer a break of 0.8435/00 to build the position back up to full size; but a bounce back towards 0.8775/00 could encourage me to rebuild from the top of the range. My USDCAD short was originally envisaged as a short-term technical setup that was playing against momentum. Having played out well yesterday so that I could take the first target and trail the stop on the remainder, I am comfortable allowing the remaining half simply play out as there is no risk attached to it. Far more risky are my AUDJPY and NZDJPY shorts. Both are based on technical setups and a belief that risk appetite is not going to hold up. Both were established at former support levels that could act as new resistance. These pairs are volatile; so reduced position size and wide stops are essential. There are many other opportunities going forward; but I'll talk more about those as they come closer to fruition.

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