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Still Searching out Short Term Setups Ahead of the ECB, NFPs and EU Meeting

Still Searching out Short Term Setups Ahead of the ECB, NFPs and EU Meeting

2011-02-03 01:41:00
John Kicklighter, Chief Currency Strategist
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The currency market was backing off its propensity for furthering trends (whether short-term or long-term) Wednesday as the backdrop for fundamentals eased. Underlying risk appetite still holds the greatest influence over the capital markets; but sustaining the already overextended run requires something material and unambiguous. We wouldn't see anything of the sort through Wednesday. The same is likely true of the coming 24 hours. We have a few notable pieces of event risk (like the ECB rate decision, ISM services sector survey and Fed Chairman Bernankes); but the breakout potential for the broader speculative space and individual currencies is relatively low. Not only is Thursday a lull, but Friday carries far more prominent event risk - which further discourages market participants from jumping into trades.

...

What does this mean for trading? We need to generally avoid setups that require significant trend development or at least expect them to take a little longer to develop and account for the greater risk associated to with developing trades around signficant event risk. Looking to the shorter-term has worked relatively well over the past 24 hours. Where the long USDCAD from 0.9910 (with a 40 point stop) was knocked out; the quick GBPAUD long from 1.5945 (with a 70 point stop and first target) would easily hit its objective. And, with momentum clearly backing off as the opposing range barrier came into view, a second objective could have leisurely been drawn between 1.6050-80. The NZDUSD short was a third opportunity from 0.78; but as per the requirement for some kind of price development, it was initial cut out at breakeven. Yet, updated in the Real Time News feed, there was a clear opportunity to jump back in from 0.7785 with a 40 point stop and objective; and a push from data, that first objective was easily hit.

...

Looking for other short-term setups, there is nothing at the momentum that can reasonably be expected to make a meaningful intraday swing with the forthcoming NFPs dampening price action. That said, there are some setups that we need to keep an eye on for medium-term developments a little later down the line. GBPJPY is exceptionally interesting at the top of its nine-month channel and range support. The fundamental risk generally supports a short-side development; but jumping in now is dangerous. Two similar setups are EURAUD and EURCAD for their individual head-and-shoulders formations over the past week after significant rallies. There is greater potential in EURCAD given its 1000-point run up and very little correction; but EURAUD has a cleaner technical picture. EURCAD is similarly better for fundamentals. EURCHF, EURUSD, EURNZD, AUDUSD and AUDJPY are all interesting as well; but their respective developments are a little further down the line.

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