Retail Positioning in Dollar/Yen Shocking; Warns of Fresh Drop
- No official plan but markets optimistic
- Bank recapitalization and EFSF expansion talk driving risk bids
- China HSBC PMIs show improvement back above 50
- Australia’s Rio Tinto out with some strong comments
- USD/JPY retail positioning ratio is shocking; warns of fresh drop
- Aussie looks like it could be ready for next major lower top
Although no official plan has been unveiled to this point, market participants continue to buy into risk on the expectation that a solid plan will be implemented by EU leaders to tackle the current Eurozone financial crisis. Much of the optimism on this front has been specifically generated from progress on the topics of bank recapitalization and expansion of the EFSF. Also seen supporting risk sentiment into Monday have been some positive developments in Asia, with China showing an improved HSBC PMI back above the key 50 level, snapping 3 months of contraction, and news out of Australia that global miner Rio Tinto expects its iron ore business to grow substantially over the next 5 years.
On the strategy front, we are absolutely shocked with the astounding retail positioning ratio in USD/JPY. Despite the market finally breaking out of its multi-day consolidation to fresh record lows, retail traders continue to buy the market with the ratio now sitting at a dramatic 16:1 long USD/JPY. While we continue to like the idea of looking to build medium and longer-term long positions in the pair, the ratio sends a message that shorter-term, we still could see some downside to yet another record low before the market is finally ready to establish a meaningful base. Once we see USD/JPY dropping and the ratio also pulling back, we will then look to finally start building into the long USD/JPY position.
Another market we like looking to trade over the coming sessions is AUD/USD. Despite the intense rally out from the early October 0.9385 lows, we classify the move as corrective and look for the market to carve out a fresh lower top below 1.0720 ahead of the next major downside extension. As such, any additional rallies should be well capped above 1.0500, and rallies towards the psychological barrier should be aggressively sold. Fundamentally, we still contend that third wave of the global crisis has yet to fully materialize in the east, and when it does, we see the higher yielding Australian Dollar as being very exposed.
Looking ahead, German manufacturing PMIs and Eurozone PMIs are due in European trade along with Eurozone industrial new orders. All is very quiet in North America with the economic calendar only producing a Chicago Fed national activity index release. On the official circuit, ECB Praet, BOE Tucker, Fed Dudley, Germany’s Merkel, and EU Juncker are all slated to speak. US equity futures are mildly bid, while commodities are also tracking higher into European trade.
EUR/USD: At this point there are still no signs of let up, although we continue to classify the latest market rally out from 1.3145 as corrective. We contend that a fresh lower top will carve somewhere near current levels and will be on the lookout for a topside failure over the coming sessions. Rallies towards 1.4000 should therefore be aggressively sold, while back below 1.3650 would confirm bias and accelerate declines.
USD/JPY:Although the market remains largely confined to the 76.00’s, the recent break to fresh record lows below the figure suggests that we still could see additional weakness before any meaningful recovery rally. At this point, a break back above 78.00 will officially be required to alleviate immediate short-term downside pressures, while back below 75.80 will accelerate declines towards major psychological barriers at 75.00.
GBP/USD: The market has been well bid since breaking the neckline of a double bottom at 1.5715, with rallies extending into the 1.6000 area thus far. The measured move objective for the pattern projects additional gains into the 1.6100’s, but any additional strength beyond this area is likely to be well capped by the 200-Day SMA in favor of a resumption of a broader underlying downtrend. As such, our strategy for now is to look for opportunities to fade additional strength above 1.6100 and towards the 200-Day SMA. Back under 1.5750 will be required to more officially alleviate immediate topside pressures.
USD/CHF: The market is in the process of consolidating its latest sharp recovery out from record lows by 0.7000. Although there are some risks over the short-term for deeper setbacks, any declines should be very well supported on a close basis above 0.8645. Back above 0.9315 will signal an end to the consolidative price action and confirm a fresh higher in place ahead of the next major upside extension back above parity. Ultimately, only a close back below 0.8500 would give reason for concern.
--- Written by Joel Kruger, Technical Currency Strategist
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