Tag Archives: forex analysis

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.

Share

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.

Share

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.

Share

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.

Share

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.

Share

Trade Review: EUR/USD (-170 pips)

Entered EUR/USD short at 1.3766 on 19 Oct. Stopped out 24 Oct at 1.3936. Result: -170 pips.

Entered with a stop at 1.3936 and a target of 1.32. Greatest open loss: 170 pips Greatest open gain: 110 pips.

It’s frustrating to be right on the macro front but get the levels/timing wrong. That’s what happened with my EUR/USD short.

I entered the trade thinking there would be a European resolution on the weekend, as planned. I was right about the Guardian story being bunk, my read on bank recapitalization plans being ratcheted down was right. Economic news has also been disappointing.

I see two possible trading outcomes from this weekend’s summit. Outcome 1: Discord, disagreement or disarray. Outcome 2: an agreement that falls short of expectations or becomes impossible to implement.

That prediction rings true. (the full reasoning is here)

What concerned about a further stock market rally but I thought 1.3936 and the 55dma would cap the rallies. I was wrong.

What I didn’t anticipate was the round of repatriation that’s going on at European banks. The threat of higher capital ratios is causing them to reduce exposure abroad and bring euros back. They are also said to be holding back on dollar lending.

What I’ve learned: As soon as the story changes, get out. The moment it became apparent that European leaders were changing the timeframe, I should have got out. I also should have recognized that there are/were way too many moving parts in the euro story to accurately forecast everything. It’s not like forecasting Australian CPI or a Fed meeting. I should have been more disciplined with the entry level.

 What I’m happy about: the initial timing of the trade was solid. I was up 80 pips within a few hours. I’m also pleased with my overall assessment of the outcome. I wish I were still in this trade because the euro is going to fall. But this is the first losing trade I have had in awhile so I’m not going to compound it by chasing.

I’m looking at USD/CAD longs once again.

Share

Selling EUR/USD at 1.3766

I have been on the sidelines and lacking conviction for the past two weeks.

First, I was expecting the US economy to fall harder and faster. More importantly, the Merkozy ‘promise to deliver a plan’ on Oct. 10 generated a 500 pip rally that left me scratching my

The headline risk surrounding this Sunday’s EU Summit became enormous. Yesterday’s Guardian article saying “France and Germany have reached agreement to boost the eurozone’s rescue fund to €2tn (£1.75tn) as part of a “comprehensive plan” to resolve the sovereign debt crisis.”

Aside from the numerous examples of bad grammar in this story (reached agreement?) there has been a wave of denials that has me convinced this story is bunk. The nail in the coffin was a WSJ report saying a bond insurance plan would be illegal under Europe’s no-bailout clause.

In addition, expectations are being ratcheted down for European bank recapitalization. The Greek bailout is fully expected but disappointing periphery growth is not.

It’s very difficult for me to price in what’s expected from the European Summit but betting against European policymakers has been the best trade of the year. Merkel and Finland’s PM today tried to scale back expectations but the market isn’t listening.

In addition, sentiment data remains negative. I’m a big believer in the University of Michigan consumer sentiment survey as a leading indicator. Last week, it was once again near a 30-year low and the lowest non-recessionary level ever.

I see two possible trading outcomes from this weekend’s summit. Outcome 1: Discord, disagreement or disarray. Outcome 2: an agreement that falls short of expectations or becomes impossible to implement.

In Outcome 2, we may see the euro rally on the news. I believe this will be short-lived and an incredible opportunity to sell.

My plan is to sell EUR/USD now with a stop at 1.3936. It’s a wide stop, at almost 180 pips but I’m targeting a drop back to 1.32 – a 560 pip reward. I’m also prepared to add to this trade in the high 1.38s.

Share

Trade Review: AUD/CAD (+311 pips)

Entered AUD/CAD long at 1.0248 on 12 Aug added on Aug 15 at 1.0295. Exited 23 Aug (+147 pips) at 1.0395 and 30 Aug (+164 pips) at 1.0459. Result: +311 pips.


Entered with a stop at 1.01 and a target of 1.05. Greatest open loss: 80 pips Greatest open gain: 340 pips.

Technicals were the primary driver for a long AUD/CAD entered on Aug. 12. The weekly chart caught my attention due to the dragonfly reversal. I also noted how rate hikes were overpriced in Canada.

My full reasoning was here

I noted that my next best idea was short CHF/JPY and that would have also been an excellent trade that was never in a negative position and gained as much as 600 pips in the same time frame.

After the break of 1.03 on Aug 14, we waited for a pullback and doubled our long position at 1.0295.

On Aug. 17 we noted there was no reason to take profits but the pair went on to post its worst one-day performance of the trade, falling 100 pips.

Despite this, we remained confident and felt a bounce to 1.03 (at least) was about to happen.

We went back to the weekly chart on Friday and it continued to look lucrative.

On Aug 22 we were rewarded with a surge to 1.04. We accurately saw this as a great time to take some profits. This allowed us to hang onto the second part of the trade for an additional 60 pips (above where we sold the first unit).

What I’ve learned: I may have rushed into buying the second unit after the break of 1.03. As we saw, there was a deeper pullback than I anticipated and this was the only time I was nervous about the trade. I targeted 1.05 so I may have exited the trade too soon. The weekly chart looks like it will get to at least 1.0550 but I’m nitpicking at a great trade.

 

What I’m happy about: Lots. I saw a lucrative pattern on a weekly chart and hung onto the trade for close to three weeks. The thing I’m most proud of is the way I sold the first part of the trade at the perfect time, nearly nailing the top on the bounce over 1.04 and locking in a nice profit that allowed me to easily wait out the next run toward the ultimate target. Opening a trade with two units or adding a second unit early on is my favourite manner of trading because it gives me this flexibility. I’m also pretty happy about noting that short CHF/JPY was my second favourite idea.

 

 

 

 

 

 

 

Share

Taking Stock, Looking to Buy USD

Today marks one month since The New Crisis started. It’s a good time to reflect and flesh out some thoughts on markets and where we’re heading. The lone trading position we’re holding is a long AUD/CAD position. He sold half of it for a 150 pip profit earlier in the week and we’re holding the other half, expecting it to go to 1.05 (spot is at 1.0348, about 50 pips higher than our entry point).

We planned to post far more trading tips here over the past month but it has been such a fast, emotional market that there haven’t been the clear trends and signals that I’m looking for. We blogged about GBP/USD for several days but the elements never aligned for us and we stayed on the sidelines. At the moment, we are thinking about jumping in on the short side.   First, let’s talk about the past month. Thinking about that time, the events that pop into my head the most quickly are:

  1. The debt ceiling debate
  2. The S&P downgrade
  3. Q2 GDP and the revision to +0.4%
  4. The Philly Fed falling to -30.4
  5. Consumer sentiment (Reuters/U Mich) falling
  6. The volatility
  7. The run/retreat in gold

 

So what has changed?

The clear casualty has been confidence. It’s hard to believe all those events took place in only a month because they have profoundly changed the mood in markets and the mood in the United States. Talk of a second recession is ubiquitous and in some ways, that is a self-fulfilling prophesy.

My own feeling is that the US will avoid a technical recession but the outcome will be far worse. It has long been my belief that the US is about to repeat the Japanese ‘lost decade’. Very slow growth and very low inflation for a very long time.

Given the differences in US culture, income disparity, low personal savings rate and fiscal squeeze the likelihood is that the US experience will be worse than what has occurred in Japan. On the upside, the largest multinational corporations will continue to profit from growth in emerging markets and China. Aside from gold and commodities, these are the only places to invest for the coming decade.

But this isn’t an investing blog, it’s a forex trading blog.

What’s going on now is the process of forming a top. This is most obvious in commodity currencies where you have investors still trying to pile into the carry trade only to be wiped out again. This will end badly. Commodity currencies, especially NZD, are going to be hit hardest in the coming weeks as risk unravels.

Why am I so confident that the risk rally is over?

Simply put: bonds. The fixed income market was first in the financial crisis and it’s first now. The bond traders are the smartest and best on Wall Street. If people are piling into 5-year T-notes at yields less than 1%, something very bad is about to happen in other markets. In this environment, you cannot be long stocks, risk FX or in any trade that has worked for the past two years.

Everything is about to reverse. When that happens where do you want to be? The US dollar. When the panic hits everything will need to be unwound. Traders will want to get out of every trade and the one they’re in the most is short USD.

In the month ahead, we will be looking to buy USD at attractive levels against the commodity currencies as we enter The New, Yet Unnamed, Crisis. The best money is going to be made in the early days so be prepared.

 

Share

$1728 Is Key for Gold

Our belief is that the two-day selloff in gold is the result of a harsh correction compounded by a leaked CME report. Gold is down $170 from Tuesday’s record high of $1912/oz.

 

Gold weekly

We think this may provide another excellent buying opportunity for gold but in order for us to buy here we want to be confident there will be no weekly close below $1728. A close below that level would create a bearish engulfing candle on the weekly chart and point to a fall toward $1500.

 

We will be ready to add to our gold longs in our retirement account on Friday if it looks like gold will close above $1728. If not, we will be ready to hold on for the ride and buy more when it’s cheaper.

Share