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Pound, Euro and Kiwi have Key Fundmental Opportunities to Trade By

Pound, Euro and Kiwi have Key Fundmental Opportunities to Trade By

2011-03-09 18:46:00
John Kicklighter, Chief Currency Strategist
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My positioning hasn't changed much from yesterday as the markets have generally turned to congestion as we await a meaningful catalyst. As usual, I think the greatest potential for meaningful volatility / breakouts / trends rests with the pent up pressure risk appetite trends. We should be on a constant watch for a possible reversal in investor sentiment that can easily drag the entire market down with it as speculators are forced to take profit or unwind their risky positions while long-sequestered bears will finally see their cue to jump in. There is certainly ambiguity to the conviction and stability of such a development; but a drop in equities across the board along with a clear adjustment for risk in the FX market, yields and perhaps even commodities would mark the most convincing confirmation. In the meantime, we have a few markers for more intermediate fundamental catalysts. The RBNZ rate decision, BoE rate decision and EU summit could each produce significant movement in their respective currencies.

...

Heading into the RBNZ decision first; we have a very high probability of volatility because of the mixed expectations for outcomes. Some expect no change, some a quarter-percent hike and there are those that are pricing in a 50bps cut or greater. That means, regardless of the outcome, someone will be surprised. That said, we need to have scenarios for various outcomes. For a kiwi favorable move (no change or perhaps a 25bps cut), I think the currency is particularly oversold against the Aussie dollar and euro. I'm already short AUDNZD is very small size from 1.36 with a 140 point initial stop and first target. That said, I think EURAUD is the better opportunity given the shift in the euro's fortunes going foward. A break below 1.87 would be a good technical trigger. On the other side of the coin, follow through on the already disappointing outlook would find NZDUSD testing tenative support in a former swing low and moderate 61.8 percent Fib at 0.7340. A break there is a clear threat.

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Looking further out, the BoE rate decision is due tomorrow and and the risk is that speculation is heavily dependent on some kind of sign from the MPC that a hike is in the near future. And, the EU summit poses the threat that no clarity on the financial aid for the region will offset interest rate expectations. For the pound, I'm still short GBPUSD having already hit the first target. A true reversal though for a more aggressive second objective is more likely should the BoE remain mum and/or risk trends falter. For the euro, I am on both sides of the market. I have a pending short EURUSD order below 1.3950 (but I will control that manually when watching the market). Alternatively, I am long EURAUD in reduced size to see if that long-term trendline break can play to the risk aversion potential while also finding a stable euro fundamental backdrop.

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For other setups, I am still long USDCHF from 0.9290. This reversal from record lows is proving far slower than I would have liked. If it doesn't make progress soon, it may be better to bail. Another risk-confused pair, the remaining half of my long USDJPY is still on and in the money. Also, I have a pending short entry order on AUDUSD should it break parity and instigate a true risk reversal.

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