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Amongst So Many Trade Opportunities, We Need to Keep a Big Picture Perspective

Amongst So Many Trade Opportunities, We Need to Keep a Big Picture Perspective

2011-02-12 00:36:00
John Kicklighter, Chief Currency Strategist

It seems that in some shape or form that every currency pair out there has distinct trading potential next week. This speaks to the underlying conditions behind the FX market. So many pairs are on the verge of what could be significant reversals - and more importantly, new trends. However, the curerrencies are only one asset class; and they generally reflect the strenght or weaknesses of individual economies' markets as well as the state of the broader financial market. This is an important notion for two reasons. First, it reminds us that more-often-than-not, there are substantial correlations across the financial markets (and just as surely as you don't want to overleverage yourself into one pair, you don't want to overleverage into one theme). Second, the currency market's relationship to the broader system means that is almost never a move that happens within this particular asset class and this asset class only. In other words, unless we see equities, commodities, rates and other assets take a drive that overcomes the the dollar and its counterparts; it will likely be short-lived.


The vast majority of the time, we need to dig for good trade opportunities. However, every now and then you see the potential across the board. This is one of those times - and it is subsequently the reason we should be on guard for the development of an underlying trend in the immediate future. With that in mind, we can run down the list of opportunities out there. From the majors, I'm already long USDJPY with the long-term outlook; and this happens to be the only one that is not projecting something more immediate (not unexpected as the yen would probably firm on a major risk aversion move). EURUSD is perhaps the most attractive setup with a head-and-shoulders pattern and 4Q European GDP figures to threaten 1.35 support. GBPUSD already pressured its rising trend channel and tentatively slipped below 1.6015; but confirmation after the weekend is required. This is especially necessary given the interest rate speculation that will be going on. AUDUSD is on the verge of once again dropping below its long-term rising trend (now around 0.9950/00); while NZDUSD has a similar trendline and horizontal floor near 0.7540. Requiring a less dramatic turn of events, USDCAD can merely hold its range and reverse Friday's excessive run with a test of its well-established range low near 0.9850. This is a setup I will look to confirm early Monday morning.


And, outside the majors, there are plenty of options. The first objective on my AUDCHF was too aggressive (and/or my my entry was poor) as the pair held and bounced at the very neckline of the H&S I was following. My trade is still on and the pattern is still attractive; but it was a setup that should have played differently. On the otherhand, the AUDCAD reversal we were watching played out very well with an accelerated reversal that benefit from the Canadian dollar's rally. This is not a position to jump into now, however. EURCAD could be a good alternative or hedge to the USDCAD range test. This pair is now at 1.3350, a clear pivot and is a good candidate for a rebound or breakdown. Given the pound's exposure to event risk, both GBPAUD and GBPNZD have bullish and bearish options. Fundamentally, I'd like the former better for the short and the latter for a long depending on the scenario. EURNZD is much like GBPAUD in technical and fundamental nature. I'm waiting to see if it can overtak 1.7825 and 1.79. There are more opportunities; but they become increasingly redundant. And, we can't watch them all - because we don't want to trade them all.

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