The FX Winner

Hello Traders, This is what JP and the big money traders think! Following the big money is not a bad idea if you know how. Here is what the scuttlebutt is for this week.

With the market anticipating the busy US event schedule along with any further developments from Europe, the Asian session on Monday seemed to be at a loss of direction especially despite the various EU political events and reports by ECB officials over the weekend. Australian 4Q PPI came in on the softer side with import prices being the main drag. AUD fell roughly 25pips following the release but has regained some of its losses. As such, G10 currencies have traded in a narrow range today – NZD is the top performer among G10s closely followed by USD.

The two main points for the week include whether the 2-week-long out-performance of EUR continues, and whether the USD-selling trend continues. Note that last week, the EUR rally combined with USD weakness led EURUSD to trade up to the 1.36’s for the first time since last November given the comments from Trichet along with the easing concerns over European peripherals.

This week is full of US events that could impact the UST yields and hence the dollar – FOMC, 2-year, 5-year, and 7-year UST auctions, along with a number of US economic data releases. We believe risk is to the downside for the greenback, given its weakness despite elevated 10-year UST yields. Thus, any weak economic numbers, strong auction results, or dovish language from the FOMC could lead to a decline in UST yields and to an easy fall for the dollar. US earnings also continue. Also keep in mind this week sees many EM rate announcements, including Bank of Israel and Hungary’s central bank today, which may have the market directing more focus on EM inflation risk.

FX: NZD (0.0%) is the only pair that gained against USD, with AUD (-0.1%) following behind. SEK (-0.3%) and JPY (-0.2%) are the under-performers. FX vol: As per usual on Mondays, vols broadly opened lower than forward vols and have drifted lower. AUDUSD gamma is being offered aggressively despite the upcoming events.

Commodities: Oil up 0.3% at $89.50/barrel. Gold up 0.7% at $1,351.40/oz. Bonds: JGB curve flattened in the morning, but faced steepening pressure in the afternoon. Equities: Equities trade mixed across the region – Nikkei +0.7%, Hang Seng Index -0.3%, Shanghai -0.4%, KOSPI +0.5%.

Until Next Time Happy Trading Kevin.

EUR/USD last week rallied sharply higher. While this was enough to alleviate near term downside pressure it was not enough to negate it. Attention this week is glued on the 1.3500 high. Definition of a bear trend in technical analysis is for lower reaction highs and lower reaction lows. Simply put EUR/USD remains in a bear trend short term while below 1.3500. A close above 1.3500 however will alter that for a recovery to 1.3739/86 then 1.3978/1.4000. Our favored scenario is for failure ahead of 1.3500 and a slide back to 1.2795, the 61.8% retracement of the move seen in the second half of 2010.

USD/CHF spent much of last week sidelined around its 55 day ma at .9726. It has not managed to clear this and as a consequence is on the defensive very near term. Dips are expected to find intraday support at .9580/70 and be contained by .9500/.9465 for an upside bias to remain.

GBP/USD rallied sharply higher last week and has virtually reached initial target 1.5911/32, the December high and 61.8% retracement. Ideally this will hold for failure, however only below 1.5680 will immediate upside pressure abate.

USD/JPY spent the whole of last week consolidating and easing lower. We would allow slippage back 82.34/00 at this point, but this is expected to hold. We view this as the market consolidating and above 83.70 we look for a re-challenge of the 84.41/51 highs seen at the end of last year. Note there is small channel on the hourly chart and above 83.25 will give an early warning of further gains.

Sometimes, some correlated currency pairs don’t move in the way that they are supposed to move. For example EUR/USD and USD/JPY go up at the same time, whereas they usually move against each other. It can happen when Euro value goes up and USD value doesn’t have a significant change, but at the same time JPY value goes down, because of some reason.

In these instances, you can use the chart below to find and trade the currency pair that its movement is intensified by an unusual movement in two other currency pairs. In this example, if EUR/USD and USD/JPY go up at the same time, EUR/JPY will go up much stronger (see the below chart).

Or if EUR/USD goes up and AUD/USD goes down at the same time, EUR/AUD goes up strongly. Another important example: If EUR/USD goes up and GBP/USD goes down at the same time, EUR/GBP goes up strongly. This May be the most important case that we can trade based on this rule. It happens many times that EUR/USD and GBP/USD move against each other and that is the best time to trade EUR/GBP.

Now you know why EUR/GBP doesn’t move strongly most of the time. It is because EUR/USD and GBP/USD move in the same direction most of the time. For example they go up at the same time and so EUR/GBP doesn’t show any significant movement because when both of the currencies of a currency pair go up or down at the same time, that currency pair doesn’t show any strong movement and direction (I hope you know why a currency pair goes up or down. It goes up when the first currency value goes up OR the second currency value goes down. For example EUR/USD goes up, if Euro value goes up or USD value goes down. If this happens at the same time, then EUR/USD goes up much stronger). The below chart includes almost all of these unusual movements and their results on the third currency pair.

Unusual Movement For Correlated Currency Pairs