Many think it is not a temporary situation and Japan will find itself in trade deficit for years to come. With multinationals opening more factories abroad than they are at home, domestic production is not expected to increase either. These are strong fundamentals working against the Yen. There is more – continues account deficit would spell trouble because it would mean the country cannot finance its huge public debt without overseas funds. Currently Japanese investors hold about 95 % of Japan’s government bonds, which lends some stability to an otherwise unsustainable debt burden. Once starts raising money abroad on larger scale, many believe the Yen will suffer.

However, the fundamentals of the Japanese Yen have been weak for a long time now, yet it continues to at least hold its ground. While certainly, they will eventually catch up with this currency, one should be prepared for a prolonged wait before that happens. In order to short the JPY with more confidence we would have to combine fundamental analysis with technicals, and those are simply not showing a reversal yet. Of particular interest should be a long-term chart of the USD-JPY, because we are talking about the main trend.

While the JPY deteriorated recently in relation to some currencies, the main chart on everybody’s list is the USD-JPY. Here we still see the price in a downtrend. It is consolidating now, between 75.50 and 79.50, but this does not mean a reversal. For the price to change direction, it must rise to at least above the latest resistance. With the USD-JPY very close to the all time low, we could easily experience another spike down. Therefore, even though fundamentals are lining up against the Japanese Yen, the technicals will not confirm it unless the price starts to test the 80.00 level.

Mike K.

Now Japan feels the threat of similar action. Her prime minister, attempting to build support for painful fiscal reforms, said Saturday that the country should be alarmed by ratings cuts in Europe and must tackle its massive public debts to avoid becoming the next target. Noda says Japan urgently needs to reduce its debt burden as the nation ages and its labor force shrinks, putting a greater burden on the social security and tax systems. He has promised to submit a bill by the end of March to raise the 5 percent sales tax in two stages, to 8 percent in 2014 and to 10 percent by 2015. To be fair, most of Japanese debt is held internally and not internationally, but another downgrade could be painful and seemingly official feel the heat.

Meanwhile in France, the Prime Minister Fillon said Saturday his country would push ahead with cost-cutting measures. The downgrade confirmed his conservative government’s plans for more reforms to bring down debts, despite worries that more austerity measures could suffocate growth. However, the government would not adjust the budget yet, saying it had been devised with an assumption of higher borrowing costs. This is typical of what we have been hearing from Europe in the last two years – plenty of talk but very little practical steps. In the end, Friday’s downgrades provide Germany with even bigger clout than before which could have a profound impact on what the EU will do to combat the problem (if they ever do anything).

Few days ago, I discussed a weekly chart of the EUR-NZD, which showed a strong possibility of MACD divergence. For a while, the weekly chart almost produced a reversal pattern, but a steep selloff on Friday closed at almost the weekly low. However, this choppiness created another probable MACD divergence, this time on the 4H chart. The divergence itself is almost guaranteed now, as long as the price makes a new low, but the EUR-NZD still needs to show a bullish reversal pattern. I would like to see a hammer or a bullish engulfing line, which would act as the trigger here, with at least 200 pips objective.

Meanwhile the CAD-CHF has consolidated, building a potential Head and Shoulders reversal on the intermediate term chart. For the pattern complete, the price must move under the latest low of 0.9238. I have a sell order at 0.9230, targeting 100 pips if it is initiated. Should the advance continue I would look for signs of resistance at 0.9400. Another pullback from that level could create a buying opportunity on a follow up breakout. As for immediate concerns, opening gaps could form and those are often exploitable. Have a great trading week!

Mike K.

The interim central bank chief Thomas Jordan is unlikely to implement important changes in present policy. If anything, he will be under even greater pressure to raise the floor. Many in Switzerland are demanding the EUR-CHF to be at 1.30 even 1.40. This probably will not happen either, at least not immediately. For now, we should expect the SNB to stick with 1.20 floor, although it does not mean an intervention at precisely that level. The price could easily drop perhaps 1.18 before any action is taken. On the other hand, the SNB might start a “soft” intervention now and keep purchasing the Euro in small dozes around the clock without major spikes. Whatever happens, “buying the Euro in unlimited quantities” is still its official policy, which unlikely to change in the short term.

The EUR-CHF is flirting with 1.21 level, possibly on its way to 1.20. I do not plan to buy it at 1.20 solely based on what the SNB is saying, but IF the price dips to 1.20-1.19 and IF there are technical reasons on the 4H/Daily chart to go long, it might not be a bad idea. After all being on the side of the central bank might be positive. Plenty of “ifs” here, so no real plan yet, but a consideration should the price drop lower.

Trade from last post involved the USD-CAD. Plan was to see initial upward continuation, followed by a bearish reversal candlestick on the hourly chart, serving as the entry signal. There was a shooting star, closing at 1.0304, which became my entry. Probably should have waited four more hours for the bearish engulfing line, but that would have produced almost identical entry. It took a while for the USD-CAD reach the 40 pips objective; however, the trade was relatively easy and worked out as planned.

Mike K.

What I personally find more important is the response of the US Dollar to positive economic news from home. In the past couple of years, the USD used to rally on disappointing domestic developments, acting as a haven. In contrast, good data tended to benefit other currencies, as if signs of recovery in the USA were good for the so-called “risk”. Recently, though, this has been shifting, with stability at home being reflected in rising USD. This means that America is not only viewed only as a safe haven, but perhaps as a bona fide good growth opportunity and holding Dollars is one way to play it. We had signs of this shift few times before, but Friday’s NFP is the most important single fundamental announcement that demonstrated this change. Now we have to see if this has a lasting effect and if it does, next 1-2 years might be good for the USD.

In a usual manner for Friday, I tried to trade early range breakouts on short-term charts. It turned out to be a difficult proposition as currencies essentially froze in anticipation of the NFP report. The GBP-USD had a fake bullish move, resulting in a loss of 36 pips. Normally I would have reversed, going short, but it was too close to the NFP, so I held out. Once the data was released and this market made initial moves, another selling opportunity emerged at 1.5422. This trade was successful and brought 40 pips gain, admittedly some luck was present with exit so close to the daily low. Have a great weekend!

Mike K.

In spite of all that, the US Dollar continues to be a safe haven. The ongoing Euro debt crisis virtually eliminated the Euro as a replacement for the USD in that role, at least for now. This unresolved issue will continue in 2012, shifting attention from problems in the US. In addition, many central banks have been, and likely will continue, to intervene in the markets in order to weaken their domestic currencies. Others are in the process of forming potential reversal patterns, which include the commodity currencies. They are starting to feel the slowing growth in China, a process that will probably only get more pronounced. Even the much-vaunted downgrade by the S&P had the opposite effect. In response, money started to flow into US Treasuries indicating which market is perceived as safe haven by markets. Finally, even the Dollar Index started to recover, after falling to 73.51. In spite of its flaws and own undeniable problems, the USD could be the biggest mover in 2012.

The EUR-USD will probably remain a proxy of general Dollar weakness/strength. On the monthly chart of this pair, we can see mounting weakness, which suggests more downside. Of particular importance is the 1.2850 support. If broken, the objective for the price will be 1.1850. Due to huge scale of this chart, this might not happen for month, the EUR-USD could even spend a big part of the year above the 1.2850 support. However, chances are good for the downward pressure to prevail and the price to continue lower.

Gold should be another good indication of Dollar’s health. Here the price has already fallen sharply from the all time high of 1920, by about 400 points. One would hardly notice it on the monthly chart, because here it only looks like a minor correction. At the same time, this chart shows an ominous development. The price formed a “falling three method”, or its “falling two” variation, which is very bearish indeed and suggests more downside. It is difficult to find logical objectives for this pullback, because of the preceding parabolic price advance. That said, two possibilities stand out. One is at 1225, and the other one is the 1000 level, as hard as it may be to imagine now. The low from last week, at 1522, is the level to watch for signs of bearish breakout.

Since the January 1 came on Sunday this year, post New Year trading could be a little different than in years past. Normally this day is very quiet, producing tight ranges, which are suitable for simple breakout trading the day after. That is not really applicable in 2013, due to lively action on Friday. At the same, typical opening strategies are not necessarily suitable either. The economic calendar is almost empty, with the exception for couple of PMI reports from Europe. Hard to say if trading on Monday is going to be worthwhile. At this point, potential gaps, if they form, are the only possible developments that could trigger traditional trades. After that, we have to see what happens. Wishing everybody great trading in 2012!

Mike K.

Unfortunately, the picture is not pretty. A lot of hedge funds and other currency-oriented managers are reporting down months, as well negative performance for the year. For example, the Parker FX Index, which tracks 57 programs run by 49 firms managing over $47 billion in currency, was down 1.3 % in October alone and 3.11 % lower for the year through the end of October. At the same time, the Barclay Currency Traders Index, which includes 117 currency programs, shows a 2.12% return for 2011. Combined, these two indexes suggest that money managers will at best break even this year, hardly impressive results. Poor returns are blamed on volatility in the Euro, with many funds publicly admitting their failure to “read” the common currency. The year is not over, but we should not expect significant changes in the last few days. Final results will be published probably in mid January.

My own trading has been positive this year even though not as good as in years past. For all practical purposes I am done, still need to close few outstanding positions, but do not expect to be very active this week. Perhaps some short term trades on Wednesday and Thursday, which will have little impact on total annual return. Markets in the USA are closed today, so we should see an uptick activity until Tuesday. Hope everybody had enjoyable holidays and best of luck to those who wish to trade this week.

Mike K.

The good news is, if there is anything good here, the EFSF can conceivably cover these contingencies. The fund estimates that Italy and Spain combined will need less than 600 billion Euros in 2012, with no precise figure available. At present, the EFSF has about 400 billion Euros available in uncommitted funds, and he International Monetary Fund promises at least 200 billion Euros, should the necessity arise. Also, the Fund will come up with more funding through a bond market in January, and European leaders promised to review the situation in March and contribute additional money. In short, there should be no default by an EU nation next year based on current predictions. The only problem is that over the past couple of years these predictions have been consistently short of reality and thing could be no different now. Guess we shall see in 2012, but to date this crisis is a bottomless hole.

Because of Christmas in a week, next few days could be jumpy in Forex. Many people take vacations, which in turn affects liquidity, meaning unusual behavior. This should be evident especially later in the week, from Wednesday onward. Currencies ended last week very choppy, offering few clues about their next direction. Consolidations in most pairs could mean both reversals and continuations. In case of the EUR-JPY, the trading range is relatively narrow, a decent candidate for a breakout trade. I am not concerning myself with direction, will let markets decide that. Potential targets here are not large, something like 80 pips.

The Swiss Franc became stronger in the last few days, following policy meeting of the SNB. It seems that markets are ready to test central bank’s resolve to maintain the 1.20 floor under the EUR-CHF. Of course, this means that the CHF is getting stronger across the board, including the AUD-CHF. I am interested in shorting this pair at 0.9300, with 150 pips objective. Because this set up in on the 4H chart, I do not expect a quick outcome, but rather 2 weeks or so duration. Opening gaps are possible, so I will be on a lookout for them and, if spotted, try to take advantage of them. Have a great trading week!

Mike K.

Already some details of the proposed new treaty made the light of day and it seems that it will not be as strict as promised just a week ago. It appears the non-eurozone countries, like Sweden, Denmark, Poland and others, would not be forced to comply with tough new budget rules, until such time (if ever) when they adopt the common currency. In addition, there will be no clause about EU wide corporate tax policies, another sore point among member states. Perhaps even more importantly, the new treaty would require ratification from only nine of the 17 eurozone members to become binding, breaking from tradition of previous treaties that have required unanimous agreement. We should find out the text of full draft next week, and see markets respond.

All this uncertainty and shortage of important news amounted to choppy price behavior for most of the day. This translated to sub-par trading in the short term breakouts I like on Fridays. In spite of a poorly defined range in the AUD-USD, I took my chance with a buy, which resulted in a swift loss of 35 pips. Soon after I sold this pair at 0.9979 and this position just missed its mark and moved against me. Once it returned to positive territory, I took profit of 8 pips and called it a day. This proved premature, as little later the price reached my intended objective of 0.9950.

There was little cohesion among currencies, with virtually all pairs dancing to own tunes. The EUR-USD, for example, formed a much better trading range in early hours, leading a good trade on a bullish breakout. This is exactly what I am looking for in these set ups – fast, strong moves for returns proportionate to the size of consolidation. All said, Friday was a mixed day, with my results basically matching the general uncertainty hanging over the markets. Have a great weekend!

Mike K.

It seems that SNB prefers to keep markets guessing, rather than doing the obvious. And why not? Its previous decision of acting unexpectedly in August has been paying off, restoring its reputation after failures of earlier interventions. The 1.20 floor in the EUR-CHF has not only been achieved with relative easy, but more importantly has held for months now. Markets have not really tested bank’s resolve to defend it, as if taking it for granted. This could change after today, but the point is that setting of the initial floor level was unexpected. Swiss authorities will probably try to do it again, but it will not be at an obvious time, like the SNB policy meeting. Chances are, there will be another shock to the markets, when participants are preoccupied with other developments. In spite of Thursday’s non-action, the SNB is not yet done with the Franc.

Here is the GBP-AUD pair I discussed in the post two days ago. The Idea was to go long on a bullish breakout above 1.5525, with entry at 1.5538 to account for the wide spread and few pips of breathing room. Frankly, though the spread in this pair is not as bad as it used to be, commonly dropping to as low as 5 pips during active hours. Originally, I targeted 1.5700, but changed my mind for couple of reasons. The price stalled at 1.5650 or so, and when it failed to move above it on a second try in a few hours, I closed it at 1.5637, for a gain of 99 pips, which happened yesterday. The second reason was more prosaic – I was busy doing other things on Thursday and unable to follow the markets constantly, thus getting out of this trade yesterday made sense to me. For Friday, I will focus on short term trades at the start on the London session, with objectives of anywhere from 30 to 60 pips depending on volatility.

Mike K.

The biggest borrowers remain the USA, Japan and collectively the EU. While at present interest rates are low in these countries, they will not stay at extremely low levels forever, which will again add to general volatility and unpredictability of markets. The recent events in Europe clearly demonstrated what happens when investors demand premium on these instruments. If the same happens to even larger borrowers that Spain or Italy, like the USA, the OECD predicts a major shock to the markets in years ahead. Especially, since borrowing needs are not projected to diminish any time soon.

While we are waiting for another debt-induced calamity to unfold next year, there is the current one to deal with. The British Pound has held up relatively well, at least when compared to other currencies. Chances are it will continue, so I am taking a look at the GBP-AUD pair. This pair has developed a strong resistance around 1.5525 and if the price breaks out above it, I want to be in. My buy order is placed at 1.5538, with a target at 1.5700. Due to high volatility of this cross, we need to pay attention to the latest support at 1.5344. If things turn around here, that could be a good place to go short.

Mike K.