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EURUSD, GBPUSD and USDCHF Market Tentative Reversals

EURUSD, GBPUSD and USDCHF Market Tentative Reversals

2011-03-08 20:32:00
John Kicklighter, Chief Currency Strategist
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It's always encouraging when there is consistency with direction across multiple pairs. It suggests that conviction is starting to take over where volatility and spasms of fundamentals once ruled. From the FX market, it was the consistency in the majors' still-hesistant effort to put in a meaningful reversal. That has played out well for a few of my positions; but more importantly, it has brought us to the verge of much bigger setups that could offer meaningful trends and momentum to work with. On the other hand, the lines of FX direction need to be synced up to underlying risk trends - as that is where the greatest potential for fundamental follow through resides on a market-wide basis. With temporary set back in rocketing oil prices, equities have rallied significantly. A true breakdown in the lines of sentiment (with or without commodities following suit) would provide the greatest poential for trend.

...

Taking stock of the dollar's notable improvement Tuesday, my existing positions have done well. My short GBPUSD (which came very close to being stopped out a couple of time) hit its first target at 1.6165 in quick form. Trailing the stop on the remaining half, I can be a little more patient as the pair works its way to a true reversal from the rising channel it has carved since the beginning of the year. Furthermore, my the remaining half of my shorter-term USDJPY long position is once again well into the money. With the second objective at 83.75 and the trailed stop at breakeven (81.85), this is another setup that has reduced risk. And, new to the mix is a long USDCHF from 0.9340. I was waiting for a break above 0.9325 after the pair setup tight congestion above its record. This is largely a speculative setup based purely on the concept that it is oversold at its extreme level. That said, since this is more technically and flow-derived; a relief rally should happen quickly. Otherwise, the fundamental pull of risk trends and Euro financial troubles could cause problems for this pair.

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And, where the dollar has shown a significant bounce, it hasn't truly instigated a solid reversal - just as surely as optimism has yet to capitulate. The tentative shift was enough to cause a short-term reversal on EURUSD below that long-term fib and short-term trendline at 1.3950; but the former range top at 1.3865 has slowed it. With a channel floor in this region, I'll look for a break of that support or a test and reversal from 1.3950 as support as means for entry (though this is fully contengent on what is going on fundamentally). AUDUSD is perhaps more encouraging but also far more tailored to risk trends. Having tested the medium-term rising trendline at 1.0050; it put in for an intrday reversal. A true, bearish break here would require a fundamental push; but when it does happen, it will offer quite the move.

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The list of other possibilities isn't nearly as encouraging as the majors. ADUNZD is still a great opportunity for a relief reversal after its extremely aggressive run. At the same time, so too is EURNZD exposed to a remarkable reversal after its over 2000-point run in just two months. CADJPY is back near its channel top; but it is too slow a mover. GBPAUD and AUDCAD are still wearing down their ranges; but my interest is on a break for each. We have time with these.

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