Euro swaps made for just about the only interesting piece of information hitting the wires in later part of trading day on Friday. The benchmark 2 year rate swaps fell to their lowest level ever at 1.5980, undercutting low established in May of 1.6050. I discussed LIBOR at that time, under similar circumstances. It is not every day that all time extremes are established in financial markets, that’s why I determined it interesting. And yes, LIBOR is also at all time low.

Interest rate swaps measure the cost of exchanging fixed and floating cash flows and are designed to help parties involved offset interest rate risk. It means these are hedging and speculative instruments on interest rates, and by extension, currencies.  There are many kinds of swaps. For those looking for a quick primer I recommend this page http://en.wikipedia.org/wiki/Interest_rate_swap. Individuals can’t really directly participate in these markets, but fundamental analysts claim to find them useful for currency trading.

For example, right now, the record low indicates that market is awash in money. It is very cheap for major financial institutions to get access to funds. Central banks have done their jobs providing surplus liquidity into the system. Unfortunately, this “money river” seems to be dammed up at the gates of commercial banks and blue chip, multinational corporations. It doesn’t spill into the broader economy of smaller business and households. As a matter of fact, credit is difficult to come by for those who could use it most. This creates conflicting picture of overall global economy- things seem to be picking up at the top but recovery is illusory for consumers.

Some vagueness is not limited to fundamental analysis. Technicals are full of them, too. However, technical analysis can be applied to all time frames of interest, while fundamentals potential is best exploited with long term horizons. True fundamental traders/investors, are prepared to wait for months, maybe years and are ready to withstand serious adverse moves during this time. I don’t have the patience to be a true fundamental trader. Using technical analysis allows me to be more active and to get out of the trades not going my way relatively fast.  Just like the latest one.

My GBP-CHF trade covered in last few posts. Move has run out of steam before the weekend. Well, didn’t really have much steam outside of the original move up. So I closed it as indicated before and took about 20 pips loss. Frankly, I also don’t like the way price behaves on 1H charts, it doesn’t fit the profile I’m looking for. If it wasn’t for Friday, I’d probably stay with it a little longer, but it wasn’t worth it. I can always re-enter the fray at some better spot, only this time using a little larger time frame, 4H chart.

Price is in a process of forming an intermediate term bottom, at least this is how it looks. Trading range is about 300 pips wide and for the bottom to be confirmed, price must move out it to the upside. Currently it is right in the middle of the congestion. Buying GBP-CHF at 1.7448 is one way to participate, with objective of about 220 pips. If the price moves lower, the 1.7250 or so level, is a good place to buy. In this case I’m looking for reversal candlestick patterns on 4H chart to be entry signal, not just specific level. Something like “hammer” or “bullish engulfing line”. Target for this trade would be 1.7415-20, just below resistance are marking the top of this zone.

Another interesting situation presents itself in EUR-CAD. Here I also think that another move up is “in the cards”. Intermediate term chart is used again. Breakout above 1.5855 is expected, with 300 pips objective. Recently this cross has been going through very deep pull backs, even if moving higher. With this in mind, I’m considering additional long entry in the neighborhood of 100 SMA on 4H chart of this pair, most likely around 1.5600.

I’m thinking about running a longer term trade here on one of currency pairs for some time on these pages. Strategy uses nothing but price action and is extremely easy to implement. I have not decided yet, because it would require few months commitment to stay with the method, in order to see it’s effectiveness. Nothing complicated, just something very simple that demands little attention. It will be posted by mid week, should I decide to go ahead with it.

Mike K.