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Trade Potential will be Heavy in Fundamental Theme Next Week

Trade Potential will be Heavy in Fundamental Theme Next Week

2011-03-26 03:44:00
John Kicklighter, Chief Currency Strategist

The week ended with something of a fizzle. Strained nerves over the past two weeks, confusion over how our fellow traders are positioning and a preoccupation with the easy to interpret return potential kept the volatility under wraps and the bullish drift in yield-favorable assets in place. This particular move delays reconcilation between prevailing price and fundamentals; but that may be a good thing. When you have major developments before the weekend, they can often fall apart when the new trading week opens as momentum has been squelched.


Next week, I'll be watching a number of particularly interesting fundamental themes that will define my trading. But, before delving into that potential; the only active trade I still have on should avoid most of these fundamental winds. My short CHFJPY from 89.75 is well in the money with the stopped trailed since the first target was hit. And, though the G7 lies in wait should the yen become unruly; that is really just a threat to USDJPY and to a lesser extent EURJPY. Furthermore, the franc holds a notable correlation to the euro in this pair when the latter shared currency starts to struggle.


As for the themes to watch, first we have the euro's health. It may seem that the market simply absorbed the developments from the EU summit and moved on; but the meeting left us with nothing - not a good outcome when sentiment and the preoccupation with yields has build up the currency's strength. I think we have an issue here that a well placed catalyst (the Irish stress test?) can shake this currency down. If that is the case, I'll look to see if there is an entry point near recent highs or if there is a break below 1.40. I would also consider EURAUD or EURNZD; but they are further along and don't offer as promising follow through. And, for a bullish euro scenario, I still like EURJPY above 115 or 116.


Risk appetite trends is another theme. This is a running concern for me and many others; but timing and conviction are difficult to peg. Should that major shift finally occur this coming week, I'll still place EURUSD near the top of the list; but I am really partial to short AUDUSD as it turns away from its post-float high.


Finally, we may have a genuine turn in the dollar's fundamental fortunes - though this may take time. This past week, we have seen officials give the greenlights for banks to raise more funds from the market, the Treasury put its MBS up for sale and policy officials offer a meaningful upgrade in tone when it comes to policy stance. We are a long way out from that first rate hike; but speculation starts early (just look at the pound and euro). That said, GBPUSD would be in a very good position to extend its already remarkable reversal and finally break that 1.5965 range low.

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