In October of 2008, during the height of global financial crisis, FED opened temporary currency swap lines with other central banks around the world. It was one of the measures taken by financial authorities to provide liquidity to the system during turbulent times. This program was meant to facilitate lending in US Dollars around the world, by exchanging USD for the currency of another country for set period of time and at fixed rate. At the expiration, central banks simply did the reverse or extended term of the of the swap. Apart from providing liquidity, this action was also meant to stabilize other currencies which simply collapsed during this time.

It is very difficult to estimate the impact the swap agreement had on financial markets because it was one of many steps taken worldwide. But for the better part of 2009 the Dollar has been steadily falling, while other currencies recovered. Now, however, this program is coming to an end. On February the 1st, FED will be closing these temporary swaps arrangements, as announced during both December and January policy meetings. With global markets seemingly stabilized, central banks agree it is no longer needed. This should effectively reduce supply of US Dollars in the global financial system, likely a bullish development for USD.

Interestingly enough, expiration of swap arrangement comes at a time of renewed volatility in financial markets, including currencies.  Dollar pairs have been building reversal patterns for last couple of months, suggesting possible bigger bullish move favoring USD. I covered AUD-USD about a month ago as an example of possible top for AUD/bottom for the Dollar. Since that time other pairs made similar moves, all favoring the greenback. Right  now they are at, or near, breakout levels on daily charts. Damming easy flow of cheap Dollars by the FED could be the catalyst for a decisive move. Or at at least one among many other reasons.

One of the currency pairs which seems ready for a large move is NZD-USD. It is very close to a support at just under 0.7000, support established in late December 2009. Price rallied early this year, but is once again falling. Break through this line would could be a good sell opportunity, with a sizeable objective.

Currently risk is relatively steep, with nearest top at 0.7450, but the potential is also large. First target would be at at 0.6500 or so, and maybe even a better one at just under 0.6200. This is a level which was recent support and previous resistance, some of which goes so far back that is not even visible on this chart. These type of polarity change from resistance to support tend to be important. On top of that 0.6200 price level would also coincide with 0.5000 FIB retracement for this entire bullish run. Nice confluence.

Timing is a little tricky. Price could easily just dip under the sell level and bounce right back to congestion and stay there for possibly few weeks, before finally falling. There are few ways of dealing with it. One is to see if support holds for now, and if it does, go short on the next move. This means potentially missing trade altogether. Another possibility is to only sell half normal size, and, once the move is confirmed, add more later on. For me, I’ll play NZD-USD on smaller time frame, but use AUD-USD on daily. Aussie is a little stronger, and is not as close to a sell level as NZD. Should we see decisive move in Kiwi, AUD-USD should also fall soon after. That’s what I will be looking for.

Japanese Yen closed the week strongly, indicating that the opening could be volatile as well. Just like last weekend, all  JPY pairs and the commodity currencies crosses are candidates for gaps. By this time tomorrow we should know if the Dollar is indeed charging ahead, or pausing for now, and decide what to do next. Should be interesting.

Mike K.