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Month-End and Quarter-End Flows to Influence Price Action

Month-End and Quarter-End Flows to Influence Price Action

2011-09-28 09:38:00
Joel Kruger, Technical Strategist
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  • Eurozone plan still not encouraging for longer end of curve
  • Month end rebalancing could factor into Wednesday trade
  • Entry points from Tuesday’s report yield profitable results
  • Still waiting for opportunity to fade Yen strength

While the latest rebound in risk sentiment has been welcome and certainly justified on a short-term technical basis, we continue to warn against any sustainable recovery in risk appetite. Our core outlook remains downbeat and we expect that the ongoing global macro instability will persist for some time to come. Ultimately this view should translate into a stronger US Dollar, lower equities and lower commodities prices (with even gold at risk for weakness). Talk of a detailed plan to help resolve some of the major problems within the eurozone has been a key driver in some of the latest price action, but no concrete plan has been officially presented at this point, and even if we do see such a plan materialize, there are still some serious concerns in the region that could prove very difficult to avoid.

Relative performance versus the USD on Wednesday (as of 9:35GMT)

  1. JPY +0.46%
  2. EUR +0.30%
  3. CHF -0.03%
  4. GBP -0.06%
  5. AUD -0.10%
  6. NZD -0.23%
  7. CAD -0.44%

Specifically (as noted by our colleague, a leading strategist at one of the major banks), the long end of the rates curve continues to show rising credit risk and does not leave us feeling any warmer about recovery prospects in the region. Even with the safer Germany factored into the equation, longer-term rates are well above the G10 average. This widening of bond spreads is highly concerning and could ultimately undermine any plans from eurozone officials which look to address only the shorter-term issues.

Moving on, with the Jewish New Year set to begin Wednesday night, market participants should be on the lookout for some added volatility in Wednesday trade as month end and quarter end rebalancings kick in. The general view here is that these rebalancings could prove to be USD supportive, with equity markets back under pressure and the need to diversify out of US Dollars being offset by a strong desire to shift portfolio weightings more heavily into the safe haven US Dollar.

In our analysis on Tuesday, we issued some ideal levels to be looking to add to USD longs and it seems as though those entry points proved to be quite profitable to this point. Our sell entry in Eur/Usd just missed being triggered, with the daily high coming in at 1.3669, while Usd/Chf also came shy of triggering on the long side. However, Cable, Aussie and Kiwi shorts all triggered and have all showed some decent follow through to this point. Of the three trades that triggered, Aussie has proven to be the most profitable, which further suggests that the risk negative market environment is still quite relevant. If we were in all of these three positions, we would recommend booking profit on Cable and Kiwi and holding onto the Aussie short from 0.9960 with a stop-loss at cost to eliminate any risk.

Elsewhere, the Yen remains extremely well bid off record highs against the buck but 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

Month-End_and_Quarter-End_Flows_to_Influence_Price_Action_body_Picture_5.png, Month-End and Quarter-End Flows to Influence Price Action

TECHNICAL OUTLOOK

Month-End_and_Quarter-End_Flows_to_Influence_Price_Action_body_eur.png, Month-End and Quarter-End Flows to Influence Price Action

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 recent break below 1.3500 confirms a fresh lower top at 1.3940 and should expose declines down towards 1.3000 over the coming days. Still, with daily studies in the process of consolidating recent declines, we would wait for a break back below 1.3360 for confirmation of bearish continuation to our next objective at 1.3000.

Month-End_and_Quarter-End_Flows_to_Influence_Price_Action_body_jpy2.png, Month-End and Quarter-End Flows to Influence Price Action

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.

Month-End_and_Quarter-End_Flows_to_Influence_Price_Action_body_gbp2.png, Month-End and Quarter-End Flows to Influence Price Action

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 in the process of unwinding from oversold and we see risks for additional corrective activity towards previous support now turned resistance by 1.5780, before the market carves out a fresh lower top and resumes declines below the recent lows at 1.5325 and towards 1.5000 further down.

Month-End_and_Quarter-End_Flows_to_Influence_Price_Action_body_swiss1.png, Month-End and Quarter-End Flows to Influence Price Action

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.

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.

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