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Keeping an Eye on EURUSD, GBPUSD and GBPJPY as We Await the Risk Reward Balance to Tip

Keeping an Eye on EURUSD, GBPUSD and GBPJPY as We Await the Risk Reward Balance to Tip

2011-02-24 05:56:00
John Kicklighter, Chief Currency Strategist
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The equities markets are extending their declines; but there doesn't seem to be a shared conviction in risk aversion through the FX markets. We have seen that in the hesistance with a meaningful bull trend taking for the dollar, yen and franc pairs; or bearish momentum to the Aussie dollar, euro and pound. Not even volatility has substantially increased as the currency specific volatility index is still holding to its two-year low. That said, we have had some intraday swings and tentative breakouts in different areas of the market that are more than enticing by suggesting the possiblity of a true trend developing down the line. However, I'm going to practice patience. That doesn't mean staying completely out of the market; but it does mean keeping with the small positions and reasonable stops and targets until there is undisputable momentum.

...

Should we get a clear move, I have more than a few setups that look primed and ready to go. It makes sense given my view of a medium-term correction in investor sentiment (pulling us back to more reasonable levels of speculative valuation) that my of my setups are of the bearish or risk aversion variety. Amongst the majors, I'm particularly interested in GBPUSD, AUDUSD, USDCHF and EURUSD. If I want a pure sentiment play, I'll go with a AUDUSD break of its three-month wedge floor at parity and continuation below 0.9850. A little more comlicated are the reversals for GBPUSD and EURUSD. The former is easier to work with given its broad 1.63 / 1.53 range and the possiblity of a reversal from that high and break of the rising trend channel from the beginning of the year. As for the euro, that is more a feel of momentum rather than hard levels. Both will need to weigh the potential for yield against risk bearings. Finally, USDCHF is very complicated. At a record low again, this can correct by sheer virtue of relative level; but the fundamental jump start to turn this pair will be exceptionally complicated.

...

If we want to look outside the majors, we still have plenty of possiblities. If sentiment is steady and rate expectations hold up; GBPAUD, GBPNZD and EURNZD will maintain their bullish bearish. Even if risk trends start to destablize; it could still theoretically support a bullish scenario. With that, I have started to build up a long GBPAUD in a very small size. Then there is AUDJPY which is at the bottom of a rising wedge and needs conviction to confirm. If I want to see a risk aversion move, I like a GBPJPY reversal below 133 or EURCHF dropping below 1.28.

...

As for existing positions, my USDCAD hit its first taget at 0.9950 and has pulled back to its trailed stop on the second half. I decided to cut out on the full CADJPY short after it quickly cleared its 84 first objective. Best to take advantage of the momentum with the channel floor so close. That leaves me with EURJPY; which I'm waiting to fullfill that risk reversal when the rate vs. risk debate is settled.

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