Incredible time to buy EUR/CHF

It’s not often that a trade comes along with so much upside and so little risk. Buying EUR/CHF at 1.2050 is one of those trades.

I didn’t think we would see 1.2050 in EUR/CHF this year and I’m sure it won’t last. My money says 1.25 is coming with 1.30 not far behind.

The SNB didn’t institute a peg to give it up 4 months later. These are serious people and all the credibility of the institution is on the line. With the situation slightly more stable in the eurozone at the moment, it’s all the more reason to be hold the peg.

The SNB releases balance sheet data later today and there are rumours of a hike in the peg. Don’t wait.

It’s not often that I’m extremely confident in a trade but if it goes bad, it’s only 50 pips. My stop is at 1.1999, no exceptions.

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Fleshing out USD/CAD

I’m torn about USD/CAD.

For months, I’ve been looking to buy any weakness in the pair but the daily chart has broken a ‘wedge’ pattern to the downside.

My base case if for a rally to 1.12 around mid-year but I won’t fight the technicals.

It’s time to take a step back and evaluate.

Some of the reasons for my expectations for a rally:

1)      Interest rate differentials. The BOC has held rates at 1.00% since Sept. 2010. If any economic weakness materializes, a drop back to 0.25% is likely. The Fed, meanwhile, is already at zero and policymakers have set a high bar for QE3.

2)      Commodity prices. It’s not shaping up to be a good year for commodities, especially if gold is excluded. Europe is headed toward recession, US construction is virtually nil and China’s growth is slowing. These factors may be priced in but I still see downside, especially with the risks from banks, brokerages and fund redemptions.

3)      The threat of crisis. The longer the world remains at the edge of the abyss, the more likely it is that something pushes it over the edge. Europe, China, the US, the Middle East, Russia – each presents a multitude of risks in 2012.

4)      US growth may see USD gains. We know that the USD will outperform CAD on safe haven trades but surprising US growth will not necessarily flow into commodities. If growth is driven by tech and the automotive sector, Canada may be left out.

5)      There are risks in Canada. Housing prices in Canada have detached from reality. Several provinces are nearing budget crisis. Trade disputes are a risk. RIM is probably done.

But that is all old news. Here is some of what has me worried.

1)      Oil. The tension in Iran is once again solidifying Canada as North America’s oil supplier. It is also driving up prices. With investment returns at nearly zero everywhere, some big money might flow into Alberta oilsands.

2)      US stimulus. I often repeat: the US will never do austerity. Instead, more spending is likely on the way, with commodity-intensive infrastructure projects likely to benefit. At the same time, such projects will keep the US deficit high, removing any USD benefit.

3)      A US bank failure (but not a crisis). After what happened at MF Global, it’s clear that nothing has changed. I wouldn’t be surprised to see a blowup at a major US financial this year. The surprise is that it will be quickly contained by the government (perhaps before the news even hits the market) and that would weigh more on USD, especially once talk of regulation re-ignites.

4)      Growth. Canada historically lags US growth. If the US posts a strong first half, there will be a lag before the market appreciates that growth will spill over to Canada.

5)      Mark Carney (BOC Gov). He seems to have a good sense of the risks facing Canada and has consistently fretted about housing. If the US starts to grow, he will beat the Fed on raising rates. If the US falters moderately, he may sacrifice rate cuts in order to control housing inflation.

I’m going to let it sink in for a few days but I’m on guard to sell soon, likely on a break of 1.0050.

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Weekend reading: catching up on EU Summit

I was out of the country and out of touch with markets last week and it has been hard to catch up with the European soap opera after missing a few episodes.

First here’s a quick guide to what happened in the EU.

The UK press has been helpful. Here’s a good article in The Guardian on seven key questions Britain must face after Cameron’s EU veto. The final three questions are the most compelling.

Britain may be forced to recognise sooner rather than later that by embracing the self-fulfilling prophecy of Eurosceptic rhetoric. Europe and the world has indeed become a more difficult place for the UK to exert its influence.

The Guardian’s news blog is also a helpful takeoff point.

The big loser in the papers so far appears to be Nick Clegg, leader of the Liberal Democrats, who are the junior coalition partner. His party’s position has always been pro-Europe and now he doesn’t appear to stand for anything. Clegg certainly doesn’t sound happy:

I’m bitterly disappointed by the outcome of last week’s summit, precisely because I think now there is a danger that the UK will be isolated and marginalised within the European Union.

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Gotta give the euro credit

Someone out there sure likes these things.

The bad news has been almost relentless since August but the euro continues to hang in there. At 1.33, EUR/USD iss down almost 10 cents in that time but that’s not bad considering the existential crisis pounding away at the bulls. Moreover, EUR/USD is holding above the 2010 low of 1.1876 and the 2009 low of 1.2331. We are almost at precisely the same levels as this time last year.

I’m bearish on the pair and that isn’t going to change any time soon but I have to concede that given everything we have learned in the past year, I’m impressed the experimental currency is hanging in there. The banks and countries are bordering on insolvency and a recession is on the horizon but someone is still buying.

You have to wonder where we would be if Europe’s banks and governments had some a slightly better job of managing their books. It may take a long time to sort out and that will undoubtedly keep the downward trend going but I’m starting to think that one day the euro will soar from the ashes, in some form.

It would be easy to point at the other side of the equation at USD but the analysis doesn’t hold up. The euro is well above its credit crisis lows against GBP and CAD while holding above the early 2011 lows in AUD and NZD.

EUR/USD rallied into the end of last year and everything tells me it will do the same in 2011. The speculative market is heavily short but the next 10 days will be round after round of short covering.

I don’t fight long term trends but my best idea here is to hope for a selloff on Friday/Monday and then jump in around 1.32 with 1.3144 as a stop and a target of 1.35.

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Cable near three-week low

Every day we spin the wheel. Pick one of the PIIGS and pick one of the four following problems: banks, bonds, politics, ratings.

One day it’s Greece and politics, the next it’s Italy and bonds. The news is never positive; just bad or good enough to spark a short squeeze.

I’m generally a trend-following trader and after two weeks of nasty, directionless gyrations, I’m frustrated.

But there may finally be some clarity. I’m closely watching cable right now. The October rebound cleared but failed to close above the 61.8% retracement of the September fall. Now, we are testing the low end of the range and a break may be imminent.

It’s doubtful that I will trade a potential break of 1.5868. Ideally we will get a close below that level and perhaps a weekly close below 1.5820. That would give be the confidence to sell GBP/USD.

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Last Gasp for The Euro

The news out of Greece is good. A coalition has been struck that will pass the EU-mandated reforms in order to receive the upcoming aid tranche. Papandreou will step down, a new PM will be named Monday and an election will be held after the aid is dispersed.

Barring any surprises (and they can’t be ruled out) this clears the way for a short-term bounce in the euro, which opened the week at 1.3780. Looking at the chart, I expect a climb toward the 100-day moving average at 1.4040, or perhaps a shade below, followed by a prolonged downtrend that will be confirmed by a break below 1.36.

 

My trade will be to sell EUR/USD around 1.40 and hang on for the ride lower. I will add on a fall below 1.36 and take profits after the first significant spike lower, or 1.32.

The two catalysts I envision for the move lower are slower growth, highlighted by further ECB cuts and political discord, which will resume in Greece in the elections and is likely to arise in Italy.

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Greek Referendum Could Be a Gamechanger

Greek Prime Minister Papandreou had a Halloween surprise for markets on Monday as he announced a referendum on the EU bailout deal. The move was completely unexpected and could throw Greece (and Europe) into chaos. The euro dropped almost 100 pips as the news hit.

The Greek public will decide whether or not to accept the troika bailout terms. It seems almost a certainty that voters will reject the deeply unpopular austerity measures, a move that would force an early election.

The referendum is slated for January and the only hope seems to be a constitutional clause that says referendums can only be held on matters of great national importance. Some are saying the current situation doesn’t apply, as hard as that is to believe.

Another hope is that Papandreou will not last long enough for a referendum, he may be defeated in a confidence vote on Nov. 2-4.

The current thinking is that Papandreou wants out or that he wants to share the responsibility of the failure of the state with the public. Bondholders who accepted a haircut only two days ago may already be having second thoughts.

Turning to the forex market, the news today highlights the endless uncertainty that will plague Europe for years to come. The euro was absolutely crushed today, falling to 1.3848 from the close on Friday at 1.4146.

The reversal back below the 55, 100 and 200-day moving averages and the close below these levels at the end of the month suggests the rally was a false breakout. Knowing that the market was positioned heavily short (via CFTC COT) it makes perfect sense. Thursday’s rally was nothing more than a massive short squeeze.

I expect a half-hearted rebound in the next day or two and I will be looking to sell it.

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All Bets Are Off as Japan Intervenes, MF Global Sinking

So far USD/JPY has shot to 79.48 from a low of 75.57 and the pair looks like it will push higher after the Ministry of Finance chomps through another set of sell orders  around 79.20. Officials may take aim at 80.00 but based on the comments out of Japan, a Swiss-like peg doesn’t sound likely.

What also has the market spooked is a few headlines from the Wall Street Journal suggesting that clearinghouses and regulators are preparing for an MF Global bankruptcy filing.

It looks as though Interactive Brokers will pick up some client accounts and the rest of the company will be placed into bankruptcy.

EUR/USD is down 120 pips, cable down 150 pips, AUD/USD down 165 pips, USD/CAD up 70 pips and gold down $35.

Intervention and bankruptcy are two of the trickiest trades out there. On the one hand, this channels Lehman and the crisis but MF Global isn’t a huge employer. On the other, what happens as all those bonds hit the market in liquidation. It certainly won’t help Italian spreads.

I want to trade this but I don’t need to trade this, so I’ll sort it out in the morning. If anything, I’m thinking of adding to my EUR/CHF long as traders are reminded about the power, and potential profits, of intervention.

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Quiet day favours further risk appetite

I have to score the ho-hum day in markets on Friday as a win for the bulls. I expected a further pullback in risk sentiment, especially with the soft Italian bond auction. My feeling is that this means EUR/USD is on its way to 1.44 and USD/CAD down to 0.9800.

I live blogged all day Friday at ForexLive so some expanded thoughts are there. My end-of-day comments are at Intermarket Strategy.

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Foreign exchange analysis from Adam Button