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The Fundamental Winds are Starting to Gust for the FX Market

The Fundamental Winds are Starting to Gust for the FX Market

2011-03-04 18:22:00
John Kicklighter, Chief Currency Strategist
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How things have changed for certain currencies in just the span of a week. The most remarkable shift comes with the euro; but altogether, these developments haven't dramatically altered any courses. Instead, they have fed already existant trends. The most prominent of these developments is an increase in underlying activity for the FX and broader capital markets. This is exactly what we want. with this sustained increase in turnover, it is far easier to generate true and meaningful trends. And, despite what it may seem with EURUSD, gold or oil; we have not yet found that elemental consistency that can feed a true trend. When stocks, AUDUSD, USDJPY, oil and all other risk-based assets that have a clear link to risk appetite trends all align to sentiment; then we will have a real drive on our hands.

...

For existing positions, my EURJPY short was knocked out yesterday when the ECB amplified its hawkish language and sent the euro up across the the board (triggering the great EURNZD long that I was looking at, but without a limit entry, it moved too quickly for me to jump on). Alternatively, a further break above 115 has put us into a possible long-term, inverse head-and-shoulders reversal. I wil keep a close on this setup; but if risk trends further progress in a major effor to unwind risk-based positions, then this could be problematic. That said, it could also be used as a risk-positive option to diversify myself. This is one for Monday. Another yen pair, my long USDJPY, would hit its first objective at 82.70. My stop on the remaining half of the position has been trailed to entry (81.85). The long-term, low leverage USDJPY exposure is still looking towards the long-term with Japanese finances and the eventual/lasting return of carry supporting this outlook.

...

Interestingly, my GBPUSD short has managed to survive the as-of-yet false break above 1.63. Having bearly missed its stop of 1.6350; I'll see how risk trends play out through the first half of next week. May need to trim it through with the BoE. And, new to my account is a low leverage, long EURAUD after it broke a prominent and long-term descending wedge. Interest rate expectations support this pair as does a risk aversion scenario. I have entry at 1.3825 and a stop of 125 points (small notional risk given my position size). I'll build it up should we retrace and hold the former channel top or if we break above the Jan 28th high.

...

In the pending list, the list has grown smaller as volatility has undermined meaningful technical setups withotu the necessary follow through to make them good trades. Still near the top of the list is AUDUSD. Note that this pair has had progressively weaker bullish responses to sharp jump in underlying sentiment. A bearish sign; and furthering my certainty that a wedge break below parity will be a meaningful event. Translating this Aussie weakness elsewhere, GBPAUD could turn into a breakout candidate (depending on what the BoE does) and AUDCAD could finally revere that large head-and-shoulders pattern. In the meantime, I like the upper channel test of CADJPY at 85.25; the breakout potential on GBPCHF; and the major reversal pressure on USDCHF above 0.9325.

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