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November 18th, 2012 at 11:04 am

Volatility Likely to Diminish this Week.

There has been a great deal of discussion lately about increased volatility in currencies. Most of that centered on the Japanese Yen, which weakened in the past few days. However, this only seems significant, because the JPY had been in an unusually quiet mode, versus the USD in particular. If we exclude this period, we can see that the USD-JPY is now only approaching the “normal” or average volatility of the 2010/2011 time frame, which was significantly below 2008/2009 years. Clearly, nothing out of ordinary is taking place, at least not yet. On the plus side, the USD-JPY became tradable again.

Even at this level, though, the volatility will likely diminish this week. While we have the BoJ meeting on the 19th, there are no expectations for drastic actions. The central bank could surprise the markets, but with Thanksgiving holiday on Thursday, currencies are likely to become quiet again in midweek. Wednesday is often not worth trading so I will focus on short-term transactions that have a chance of concluding before Wednesday. BTW, the post Thanksgiving Friday can be an eventful day and I will discuss it in a later post.

The Kiwi became stronger in late Friday trading, creating interesting situations in some of its pairs. In relation to the Aussie, for example, it formed potential Head and Shoulders bearish reversal on the 1H chart. We can see a well-defined neckline at 1.2710 that presents a good selling opportunity. Unfortunately, there is a small problem. The price closed very close to this level, meaning the support could be tested at the open. Not trusting the early price swings of the week I do not want to get in right away. Instead, I will wait for another minor low to form, which would be the entry point for the eventual trade. That of course means that I might miss the move, but it is an acceptable risk.

Another currency pair of interest is the EUR-CAD, or more to the point, its hourly chart. The recent rally here appears to be over, with price falling from about 100 pips from 1.2828. If the selloff continues, the EUR-CAD is likely to revisit the 1.2670 area and I will try to capture about 40-45 pips with entry at 1.2717. This objective is small, but could be reached fast once the order is triggered. Have a great trading week!

Mike K.

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