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Risk Rally Underway; Positioning for Fresh Trade Opportunities

Risk Rally Underway; Positioning for Fresh Trade Opportunities

2011-09-27 05:10:00
Joel Kruger, Technical Strategist
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  • Talk of detailed EU plan helps to prop sentiment
  • US Dollar at risk for weakness over coming sessions
  • Ultimately we still however look for opportunities to buy the buck into dips
  • See below for attractive entry points for trades on Tuesday

Markets are showing signs of rebound in the early week and we had been warning of the possibility on Friday and Monday after technical studies were showing the need for some form of corrective price action. We had said that we envisioned some form of a positive fundamental catalyst that would ultimately inspire some short-term buying in risk before markets would ultimately once again relent to the broad risk off trade. The fundamental catalyst has indeed come and it is in the form of reports that EU officials are working on a detailed scheme to help restore a sense of confidence in the eurozone region. While we do not expect any of this renewed optimism to last, it is quite possible that the rally in risk continues for a few more sessions.

This ultimately should translate into a lower US Dollar and higher currencies. With this in mind, the strategy over the coming sessions should be to wait and take shots at selling currencies and buying the buck on overextended intraday moves. Broader global macro stresses and uncertainty are still very legitimate and once any optimism from the latest prospective EU plan fades away, we should once again see a broad based liquidation of risk correlated assets and rally back into safe haven flows which benefit the buck.

We will look to break down some of the major currencies and offer our ideal sell levels for Tuesday trade in an effort to provide even more clarity. Please note however, should these entry levels be filled and show no follow through by the end of the day (5pm NY time), we recommend exiting the positions and looking for fresh opportunities on Wednesday. The following is a list of some of the more active currency pairs and ideal entry points for trades on Tuesday:

EUR/USD – Look to Sell at 1.3670

GBP/USD – Look to Sell at 1.5665

USD/CHF – Look to Buy at 0.8900

AUD/USD – Look to Sell at 0.9960

NZD/USD – Look to Sell at 0.7910

As far as the Yen is concerned, we continue to warn against the accumulation of additional Yen at current levels, and see this market at a serious risk for major weakness going forward, even in the event of additional strain on the global macro economy. Japanese officials have been actively warning of intervention, and the Bank of Japan has more than enough at its disposal to be able to buy a significant amount of US Dollars.

As such, just as we have already seen with the Franc, the Yen will also be at risk for a major sell-off should the current state of affairs continue (ie risk liquidation). We therefore hold firm in our broad based USD bullish outlook and continue to like the idea of looking to fade any additional Yen strength against the major currencies. At this point, we can offer no official entry points for the USD/JPY trade, but will let you know as soon as we see something that looks attractive.

ECONOMIC CALENDAR

Risk_Rally_Underway_Positioning_for_Fresh_Trade_Opportunities_body_Picture_5.png, Risk Rally Underway; Positioning for Fresh Trade Opportunities

TECHNICAL OUTLOOK

Risk_Rally_Underway_Positioning_for_Fresh_Trade_Opportunities_body_eur.png, Risk Rally Underway; Positioning for Fresh Trade Opportunities

EUR/USD: The sharp pullback below the July lows and establishment below the 200-Day SMA solidifies the prospects for the carving of a major lower top on the monthly chart which now ultimately projects additional declines down towards the 1.2000 area over the coming weeks and months. The latest inter-day rally off of the 1.3500 area lows has stalled out within our projected lower top region between 1.3835 and 1.4055 and Thursday’s break back below 1.3500 confirms the lower top at 1.3940 and should accelerate declines down towards 1.3000 over the coming days. Still, with daily studies looking slightly stretched, look to sell into a rally towards 1.3700 rather than attempting fresh shorts on downside breaks. Ultimately, only a close back above 1.3940 delays outlook and gives reason for pause.

Risk_Rally_Underway_Positioning_for_Fresh_Trade_Opportunities_body_jpy2.png, Risk Rally Underway; Positioning for Fresh Trade Opportunities

USD/JPY:This is a market that looks like it trying very hard to establish some form of a base after recently setting fresh record lows just under 76.00. Although the downtrend remains intact and has been fairly intense, longer-term studies welcome the prospects of the formation of a material base and shift in the overall structure. Price action over the past several days has been confirming, with the market very well supported in the 76.00’s and unable to extend the downtrend to fresh record lows. From here, we look for the establishment back above the 50-Day SMA to reaffirm our recovery outlook and accelerate gains towards next key resistance by 80.25 further up. Ultimately, only a daily close back under 76.00 delays.

Risk_Rally_Underway_Positioning_for_Fresh_Trade_Opportunities_body_gbp2.png, Risk Rally Underway; Positioning for Fresh Trade Opportunities

GBP/USD: The market has now extended declines to our objective by 1.5350, with the setbacks matching the December 2010 lows. While we continue to project additional weakness over the medium-term, short-term technical studies are quite stretched and as such, we see risks for a potential corrective rally before the underlying downtrend resumes. Look for a bounce over the coming sessions back towards previous support now turned resistance by 1.5780 where a fresh lower top will then be sought ahead of the bearish resumption.

Risk_Rally_Underway_Positioning_for_Fresh_Trade_Opportunities_body_swiss1.png, Risk Rally Underway; Positioning for Fresh Trade Opportunities

USD/CHF: Although daily studies are showing overbought and warn of the potential for a short-term corrective pullback, the recent daily close back above the 200-Day SMA is significant and now opens the door for the next upside extension towards 0.9500 further up. Medium-term and longer-term studies still show plenty of room for upside ahead, while the short-term outlook also remains constructive above 0.8645. Ultimately, only back under 0.8645 delays short-term outlook and would open the door for a more sizeable corrective decline. Still, even at that point, buying into dips would be the preferred strategy. Any intraday dips back towards the 0.8900 handle are viewed as solid short-term buy opportunities.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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