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Tight Ranges Emerge as Holiday Liquidity Conditions Begin to Set In

Tight Ranges Emerge as Holiday Liquidity Conditions Begin to Set In

2011-12-19 14:30:00
Christopher Vecchio, CFA, Sr. Currency Strategist
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Fundamental Headlines

European Ministers Seek $261 Billion in IMF Crisis Funds – Bloomberg

S&P Cut Proves Absurd as Investors Prefer U.S. – Bloomberg

Fate of Payroll Tax Uncertain – Reuters

Europeans Stash Money Elsewhere – WSJ

North Korean Leader Kim Jong Il is Dead – WSJ

European Session Summary

Holiday trading conditions have returned once again, though the current stint’s duration is likely to be a bit longer than the previous intercession. Over the next two weeks, with a significant portion of the world’s liquidity drained from markets, tighter ranges are expected to hold, as they did in the Asian and European sessions thus far. One perceivable benefit of this year’s illiquid market conditions could be that currency pairs will decouple from their recent significant correlations, allowing each pair to behave on its own for the next few weeks.

USD/CAD 5-minute Chart: December 18 to 19, 2011

Tight_Ranges_Emerge_as_Holiday_Liquidity_Conditions_Begin_to_Set_In_body_Picture_10.png, Tight Ranges Emerge as Holiday Liquidity Conditions Begin to Set In

Charts created using Strategy Trader– Prepared by Christopher Vecchio

To this end, there’s been an interesting shift in capital flows in the overnight, supportive of the idea that currencies are decoupling from broader risk trends. The Canadian Dollar and Swiss Franc were the best performers in the overnight, while the Australian Dollar and the British Pound were among the worst performers. The Canadian Dollar appears to be finding support on relatively higher equities and firmer oil, while the Swiss Franc is still seeing capital flows on the Swiss National Bank’s bluff to raise the EUR/CHF floor to 1.2500 or 1.3000. As the EUR/CHF nears 1.2100, it is likely to attract significant buying interest and as such, we will look to buy at said level.

On the flip side, the Aussie has come under pressure on more Asian growth concerns, in particular, related to Chinese growth in the periods ahead. Meanwhile, the British Pound has come under pressure after a report in the overnight showed that British home sellers are cutting their asking prices for the second consecutive month. Indeed, the stagflating British economy is weighing on the Pound.

24-Hour Price Action

Tight_Ranges_Emerge_as_Holiday_Liquidity_Conditions_Begin_to_Set_In_body_Picture_7.png, Tight Ranges Emerge as Holiday Liquidity Conditions Begin to Set InTight_Ranges_Emerge_as_Holiday_Liquidity_Conditions_Begin_to_Set_In_body_Picture_1.png, Tight Ranges Emerge as Holiday Liquidity Conditions Begin to Set In

Key Levels: 13:55 GMT

Tight_Ranges_Emerge_as_Holiday_Liquidity_Conditions_Begin_to_Set_In_body_Picture_4.png, Tight Ranges Emerge as Holiday Liquidity Conditions Begin to Set In

Thus far, on Monday, the Dow Jones FXCM Dollar Index is higher, trading at 10038.83, at the time this report was written, after opening at 10025.21. The index has traded mostly higher, with the high at 10069.80 and the low at 10024.95.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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