FOREX TRADING

Market Outlook

= USD: relief bounce on FOMC?

Intervention by the BoJ and a surprisingly brutal reaction to SNB forecast revisions caused trends to shift in G10 currency markets over the past week and threaten to compound volatility over the coming days as the FOMC meets to discuss monetary policy and in the UK the Sep MPC meeting minutes are published. The USD may be in a win/win position going into the FOMC. If the Fed are downbeat, the USD may benefit from a risk sell off, while if they are more positive, it may benefit from a back up in US yields as QE2 fears are put on the back burner. With the EUR suddenly back in favour and central bank intervention forcing investors to trim long JPY and CHF strategies, predicting flows under a ‘risk off’ scenario is not straightforward. Even though correlations with risk have rebounded, we are alert to retracements in EUR crosses as talk of debt restructuring flares up in the periphery and risk reversals signal a possible counter trend move.

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The Week Ahead

Highlights

• USD recovery, risk sell-off likely to continue
• Weber comments soften the euro
• Australian election this weekend
• JPY strength may demand government action
• Key data and events to watch next week

USD recovery, risk sell-off likely to continue

After consolidating for much of this past week, the USD surged again to finish the week at new recent highs. The gains came in the wake of a disappointing US weekly jobless claims report and a shocking drop in the July Philadelphia Fed Index of local manufacturers, which fell to -7.7 from +5.1 in contrast to forecasts of gain to +7.0. USD strength in the face of weaker US data again illustrates the role of the USD as a safe haven currency. As the US outlook continues to deteriorate it spells bad things for the global growth outlook, undermining confidence and raising risk aversion. On Friday, Bundesbank Pres. Weber added another reminder of the dimming global outlook and latent Eurozone financial sector stress (see more below), sending the EUR sharply lower, but ultimately the USD higher across the board.

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Highlights

• Stress test results are in–Yawn
• Sterling bolstered as some of the economic gloom lifts
• German recovery becoming difficult to ignore
• JPY-strength becoming an issue in Tokyo
• Key data and events to watch next week

Stress test results are in–Yawn

The long-awaited results of the Eurozone banking sector stress tests were delivered on Friday and markets greeted them with a collective yawn. Earlier leaks led markets to conclude the adverse scenarios would not be especially stringent, causing most to discount the results. To re-cap, only 7 of the 91 banks tested failed, requiring a total of only EUR 3.5 bio to be raised in new capital. To put that number in perspective, some analysts reckon Spanish banks alone need to raise EUR 40 bio to be adequately capitalized. The stress tests also excluded the potential for a sovereign debt default and focused only on securities held in banks’ short-term trading books, and not the 90% of banks’ government bond holdings that are classified ‘hold to maturity.’ But the basis of the European debt crisis was exactly that–banks holding large amounts of Euro-area government debt were vulnerable in the event of a sovereign default. The lack of credibility of the stress tests raises the risk that market concerns over Euro-area financial sector stability will resurface, leading to another round of speculation that the EUR is a doomed currency. (more…)

Euro 1.4405

Initial support at 1.4258 (Jan 4 low) followed by 1.4218 (Dec 22 low). Initial resistance is now located at 1.4484 (Jan 5 high) followed by 1.4536 (Dec 17 low)

Yen 92.35

Initial support is located at 91.26 (Jan 5 low) followed by 91.00 (Dec 22 low). Initial resistance is now at 92.74 (Jan 6 high) followed by 93.22 (Dec 18 High).

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher yesterday, slipped above 1.4450, topped at 1.4483 but further bullish momentum was rejected as price whipsawed to the downside, bottomed at 1.4346 and closed at 1.4363. On h4 chart below we can see that this was a case of a false breakout which usually trigger bearish pressure testing 1.4250 area. We need the price to close below that area to confirm the bearish scenario testing 1.4127 – 1.4000 this week. Immediate resistance at 1.4400 – 1.4450 area.

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A day trading robot? Gee Wiz! Sounds like science fiction, right? It did to me just a few years ago. I would have never imagined that such a thing was possible. First of all, I came from a school of thought that believed nothing could be programmed to trade the markets successfully. I strongly believed this and argued with anyone that crossed my path. “No automated day trading system could tackle the stock market; impossible!” or so I thought. I also said to myself, “How could a computer program successfully factor fear and greed [the emotions that move the market] into an equation designed to extract consistent short-term profits from the market each and every day?” Well…,

…the bad news is that there really isn’t a robot to day trade stocks. Sorry to burst your bubble.

But…the good news is that there is one that day trades currencies (you know, the great forex market that I love and have bored you over and over with throughout this website?).

No folks; this is not “Forex Made Easy.” This is “Forex Made Easier”- An automated day trading system that NOT ONLY comes with a highly sophisticated set of conditions to enter and exit the market, but one that also pulls the trigger (that is, executes the trades) for you, using proper money management without which day trading is doomed to failure. This automated system is also known as Forex Robot or FX Bot.

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EUR/USD closed higher due to short covering on Monday as it consolidated some of this month’s decline. The mid-range close sets the stage for a steady to higher opening on Tuesday. Stochastics and the RSI are turning bullish signalling that sideways to higher prices are possible near-term. Closes above the 20-day moving average crossing are needed to confirm that a short-term low has been posted. If its renews this month’s decline, the 38% retracement level of the 2008- 2009-rally crossing is the next downside target.

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Dollar Consolidates Gains Before Christmas

Consolidating its recent strong gains, the dollar fell on Wednesday as investors took profits before the Christmas holiday. US personal income and spending rose slightly less than expected in November while new home sales unexpectedly decreased 11.3% m/m. The US economic weakness is temporary, not indicating the economic recovery is faltering. The S&P 500 rose 2.57 to 1,120.59. The yen and euro gained for the first time in seven trading days. Sterling declined modestly, pressured by Bank of England minutes that showed BOE policy makers unanimously kept their bond-purchase plan at £200 billion. The Australian dollar was supported by rising commodity prices. Despite slightly lower-than-expected Canadian GDP growth, the Canadian dollar rose for a fourth day, boosted by Canadian Finance Minister Jim Flaherty’s comments that he wouldn’t be surprised if China and Russia bought the Canadian dollar to diversify their currency reserve holdings.

The dollar index fell from a nearly 3-month high. After breaking its long downtrend, the dollar index surged as investors exited huge short dollar positions. We believe the dollar rally will continue; however, the dollar index, following sharp gains, may require further consolidation before new advances. Today the index found support from the short-term uptrend. There are important supports in the 77 and 76 areas, minor resistances at 78.50 and 79.50 and significant resistance in the 81 area. Thin market conditions over the holidays may exacerbate movements.

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Currency Currents

Key News

• The European Central Bank won’t bail out debt-stricken member states such as Greece, which must repair its public finances on its own, ECB governing council member Ewald Nowotny said.(WSJ)
• The rand declined to a six-week low on speculation the interest-rate appeal of holding South African assets may diminish as the dollar appreciates. (Bloomberg)
• Hungary’s central bank will probably cut its benchmark interest rate today to the lowest level since the fall of communism to speed the country’s recovery from its worst recession in 18 years. (Bloomberg)

Quotable

“A tale of two worlds. We forecast 4% global GDP growth in 2010, but this masks two very different stories. One is a still fairly tepid recovery for the advanced economies. The other is a much more positive outlook for emerging markets, where we forecast output to grow by 6.5% in 2010. In short, we think that the themes of global rebalancing and EM growth outperformance have staying power and have even been bolstered by the crisis.”

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Daily Technical Analysis

EURUSD Outlook

The EURUSD attempted to push higher yesterday, topped at 1.4589 after some good results of manufacturing and services PMI data, but further bullish momentum was rejected as the pair closed lower at 1.4529. This fact should keep my bearish scenario targeting 1.4450 and 1.4250 this week remains intact. On h1 chart below we can see that price still trapped in a range area of 1.4585 – 1.4500 area indicating consolidation but the bias remains to the downside. We need a consistent move below 1.4500 area to continue bearish momentum towards 1.4450 – 1.4400 area today. Immediate resistance at 1.4589 area (yesterday’s high) and the trendline resistance area (red). Break above those area could be a threat to my bearish scenario and lead us into no trading zone.

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Forex Technical Analytics

CHF

The pre-planned buying positions from key supports have been implemented with attainment of minimal anticipated target. OsMA trend indicator, having marked low activity of both parties does not give grounds for any amendments to earlier designed trading plans. Therefore, we can assume probability of rate return to 1,0220/40 supports, where it is recommended to evaluate the development of the activity of both parties in accordance with the charts of a shorter time interval. As for short-term buying positions on condition of the formation of topping signals the targets will be 1,0280/1,0300, 1,0340/60 and (or) further break-out variant up to 1,0400/20, 1,0460/1,0500. The alternative for sales will be below 1,0160 with the targets of 1,0100/20, 1,0040/60.

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No Afternoon Wall Street Nap

In afternoon trade oil and gold are taking a huge trip lower, with oil off from 73.60 to 70.60 in two 30 minute time periods. Gold has reversed from 1145 to 1128 in the same time-frame, just as S&P trade drops from 1095 (the swing point posted yesterday) to test 1088 support. These are small percentage moves in S&P equity trade (0.3%), but are starting to increase towards 1% drops in the commodity markets.

The S&P futures market is holding 1087 support, and now will battle 1095 and then 1105 as target areas for any bullish moves today. The higher the S&P moves, the weaker the Usd will become.

The reaction historically would be to see increased Usd buying, as the move from stocks to bonds takes place, but instead we are seeing the major pairs do nothing more, as yet, than hold near-term support that was put in place in the Asian and European session. If major currency pairs hold 1.4650 on euro, 1.6180 on cable, 0.9000 on aussie, 1.0525 on cad, and 1.0280 on swissy, it will be a very clear signal that the Usd is running out of buying momentum.

We await the New Zealand interest rate announcement and press conference at 15:00 EDT, and look forward to Swiss and U.K. rate decisions on Thursday, all of which have the potential to turn each currency pair upside down as the news/statements/rates hit the wires.

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Daily Technical Analysis

EURUSD Outlook

The EURUSD had a bullish momentum yesterday, topped at 1.5116 and closed at 1.5074. On h4 chart below we can see that my bearish channel has been violated to the upside indicating potential further bullish momentum at least testing 1.5140/50 area before aim for 1.5300. Immediate support at 1.5062 area. Break below that area should lead us into no trading zone in nearest term testing 1.4950 area but the overall sentiment remains negative for the Greenback. Stocks market seems to recover nicely from Dubai World panic reaction last week while gold keep making new all time highs pressing the Dollar down

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FX Technical Commentary

Euro 1.5080

Initial support at 1.4964 (Nov 30 low) followed by 1.4828 (Nov 27 low). Initial resistance is now located at 1.5117 (Dec 1 high) followed by 1.5144 (Nov 25 high)

Yen 86.70

Initial support is located at 85.87 (Nov 30 low) followed by 84.83 (Nov 27 low). Initial resistance is now at 88.01 (Oct 7 low) followed by 88.63 (Nov 25 High).

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Daily Technical Analysis

EURUSD

The pause in Euro rally triggered by Dubai World debts payment delay so far expected to be temporary as after hit bottom at 1.4827, Euro recovered quickly, closed much higher at 1.4985 on Friday and the trendline support still did a good job prevented further bearish attack thus technically keep the bullish scenario intact, especially if price able to move consistently above 1.5062 today, which is technically potential to be tested after rebound from 1.4827. However, note that the false breakout from 1.5062 area (see my daily chart below) also hide a potential bearish view and price could make another downside attempt testing the trendline support and 1.4827 once again, especially if price break below 1.4920/00 area today. No one knows whether the impact of Dubai World is only a temporary panic reaction last week or will continue to shake world stocks market thus could bring the Dollar higher this week. The bias is bullish in nearest term testing 1.5062. Valid break above that area should trigger further bullish momentum towards 1.5140/50 area

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