No official comments yet, but it is hard to imagine this particular proposal to be received friendly in Athens. They already have to contend with another set of demands that must be met before the next installment of bailout is released. They include cuts in healthcare and defense spending, commitment to eliminate another 150K government jobs in three years and scores of other painful steps. All of this is piling up when even talks with creditors on debt swap are not fully concluded. Forcing Greece to accept all of these measures could easily push this country out of the Eurozone and perhaps even EU. Other members could realize they might be next, which would endanger entire structure of the European Union.

With no currencies forming short-term reversal opening set ups (even though the last one did not work out), I will be looking for gaps in early trading. After that, the beast looks interesting. It already dropped to 120.00, but recovered to some degree. General shape of the price suggests more downside, so I will try to go short here. I have two different sell orders, one at 121.00 and the other at 119.90, each seeking 100 pips.

Another currency pair of interest is the EUR-AUD on the 4 H chart. It is slowly building a bottom reversal, which will be complete on a breakout above the last high. Here I want to buy it at 1.2490, targeting 1.2600. Of course, this price action could develop into a flat consolidation, which would be bearish in nature. If the EUR-AUD breaks out like it last time, with immediate rejection, I will most likely close the trade immediately and tale the loss. That would be a good sign that the price is not developing as planned, so hands off. Have a great trading week!

Mike K.

The BoJ will be followed on Wednesday with policy meetings in the USA and New Zealand. While the RBNZ announcement has the highest probability of some action, all eyes will be on the FED. Nobody expects a change this time, but it will be the first meeting when the central bank releases its interest rate projections. It goes without saying that everybody wants find out when FED expects the first interest rate hike and how much tightening is projected in the following years. Also, in recent few weeks public comments by regional FED presidents seem to signal a willingness to ease monetary policy further this year, the so-called QE 3. Latest fundamental data has been mostly positive, indicating economic growth, well, recovery in the USA. That does not rule out any action, but it probably pushes any announcement of a major policy move out to meeting later in the year. We will find out in few days.

Recently the uptrend in the AUD-CHF has become very choppy, as if ready to reverse. Corrections are bigger, volatility is higher, possibly building a top on the intermediate term chart. I would like to short it if the price dips under the recent low of 0.9695, with entry at 0.9690. This trade, if filled, will attempt to capture 120 pips. Alternatively, if the AUD-CHF continues higher and makes a new high, it is likely to form a divergence with the MACD. In such event, it could offer a decent shorting opportunity.

Another currency pair of interest is the EUR-CAD, also on the 4H chart. Here the price already bounced from the low of 1.2875 to 1.3147, perhaps forming a bottom. I want to go long on a bullish breakout with entry at 1.3155. The target is 1.3300. There is a small complication; I would like to see a little more pullback first. Not necessarily much lower, but I do not want to enter into a trade if the EUR-CAD rises right after the open. Initial opening moves often lead to false breakouts, something I want to avoid. After the first few hours, the order becomes valid.

While waiting for those trades, which could take some time because of relatively large time scale, I will look for shorter-term opportunities. One of them could materialize in the GBP-USD, among others. After a sharp rally on Friday, the cable is likely to go through a correction. Preferably, I would like to see a little continuation, but the signal itself will be a bearish reversal candlestick pattern on the hourly chart. Objective will be 50 pips, although details will have to be worked out once the entry is confirmed. Have a great trading week!

Mike K.

Is it turned out, the Standard and Poor’s itself provided a solution, of sorts. On Monday, the rating agency downgraded the EFSF to AA+ from AAA, reflecting its recent cuts to credits of individual countries. This means that Germany no longer will have to come up with a bigger share of fund. From a practical standpoint, this downgrade is more symbolic than real and should seriously raise borrowing cost for the facility. Just look at the USA, which suffered the same fate few months ago, yet still enjoys historically low costs. On balance, this action will most likely not carry any meaningful consequences, but certainly adds to confusion and increased sense of uncertainty.

This week some currencies created opening gaps. While easy to spot, they were very big, but a few of them were still worth the trouble. I focused on the AUD-USD, because it gapped down, and then continued lower. My ideas was to simply follow the latest high with a buy order using 5m chart and try to get in on a reversal. Eventually, my order was filled at 1.0276. After what seemed like a long wait, the AUD-USD finally reached my objective, bringing 30 pips. Not too bad, given limited potential here.

In the last post, I discussed a possible Head and Shoulders on the 4H chart of the CAD-CHF. It is no longer possible; price action did not form the pattern. However, my sell order remains valid, for now at least. At the same time, also as covered before, the CAD-CHF tested the 0.9400 level again and pulled back. Now I am interested in buying it as well on a move above the resistance. I have buy order at 0.9410, and this trade, if it happens, has a 100 pips objective.

After falling to near the all time low, the GBP-JPY is trying to reverse. On a short-term chart, hourly, we can see a possible rounded bottom under construction. The pattern will not be confirmed until the price moves above the latest minor high at 118.25. With this in mind, I placed a buy order at 118.33, target a 100 pips run. This is just a (possible) short-term reversal, not necessarily the bottom for the main trend. In addition, if the GBP-JPY keeps moving sideways for much longer, even a minor reversal will become unlikely. Prolonged consolidation favors resumption of the previous trend, down in this example.

Mike K.

There will not be an immediate downgrade, because the agency is giving the U.S. government until 2013 to come up with a “credible plan” to tackle its ballooning budget deficit. Fitch estimates that in order to keep the US federal debt at an already high level of 90% of GDP later in the decade, the government will have to come up with $ 3.5 trillion in reduction measures. At this point, it is a tall order, considering the $ 130 billion deficit last October alone, and projections do not see a balance budget for at least 10 years. Today’s announcement indicates that rating will not be cut until 2013. However, that could be more harmful than doing it now, because by that time interest rates might be on the rise and a downgrade would make refinancing of existing debt more costly.

Time to review couple of trades from earlier this week. Admittedly, nothing worked out as planned. The EUR-JPY made a bullish move, triggering a buy order at 101.84, with 80 pips objectives. After a couple of days of slow advance, the price came within few pips of the target before reversing sharply. In most cases, I get out and this trade was exception. I managed to salvage 31 pips from this trade and this was the highlight of the day.

Another trade discussed in the same post was a short in the AUD-CHF at 0.9300 with a 150 pips objective. Here the price action turned opposite of my intentions and I took a 100 pips loss. That said, I would try to sell this pair again at 0.9260, if the support is breached. The target remains at 150 pips. Because I am using the 4-hour chart, this set up can take some time to conclude… For the next two days I am interested only in short term trading at the start of the London session and might even skip Friday altogether for a longer Christmas vacation.

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.

His action prompted talks about UK being isolated and for all practical purposes, having nothing to say about European affairs. Some analysts even say that Great Britain might as well exit the EU altogether because it has burnt all the bridges and will suffer the wrath of Brussels in one way or another. All of this is probably premature, speculation generated by press and not official sources. Eventually, perhaps, EU regulations could bite London financial services, when (if) the long discussed financial transaction tax is imposed. For now, we should leave it to the markets to decide if this supposed isolation is credible, and if so, will it actually hurt Great Britain. A good barometer of this sentiment could be the EUR-GBP currency pair.

The EUR-GBP has been in a massive consolidation for a few months now. While it is moving down, the progress is so slow, that it is painful to watch, never mind trading it. Now, however, bulk of the action is around the support of 0.8525. Given the general bearish sentiment, the price is trying break below the support. If that happens, the markets might be saying that British “isolation” is not necessarily too bad. We should find out this week.

A week ago, I discussed a consolidation in the AUD-NZD. This pair is locked in trading range between 1.3056 and 1.3266, and last week brought no change in this status. I still have both sell and buy orders, waiting for a breakout either way, with an objective of 150 pips. Admittedly, price behavior last week favors a bullish breakout, but that could change, given the time frame involved (intermediate). We can easily wait another week for a conclusion here.

Most of the currency pairs closed on Friday in a way that does not suggest the short-term reversal strategy plays in the early hours today. This means that I will be watching for opening gaps. In addition, the CAD-CHF could present a sell opportunity if the price pulls back to latest low. Right now, I have a sell order at 0.8987, targeting 0.8900. All of the commodity currencies show similar conditions in relation to the European currencies, something I might address tomorrow. Have a profitable week!

Mike K.

Among them are structural changes to the Lisbon Treaty, the cornerstone of the European Union. Some details will be unveiled on Monday and we will get a glimpse at their scope. Another proposal calls for loans from EU national central banks to the IMF, so that institution has enough funds to help if needed. Yet different plan suggests creating “national redemption funds”, where member countries would effectively siphon off a chunk of their debt to a special national fund and pay it off over about 20 years while committing to reforms to keep debt levels on target. None of this will solve the reason behind the crisis, excessive spending, and until individual countries deal decisively with their budgetary deficits all this fantastic proposals will only prolong the problem and not fix it.

The USD-CAD rallied on Friday after weaker than expected Canadian employment data. Interestingly, that set tone for the rest of the day, with the USD largely gaining across the board. This move opens a possibility for a bullish reversal for the USD-CAD, but first a pullback is more likely. After the open, I will be looking for a short trade, once a bearish reversal pattern shows up on the hourly chart. Objective will be 40-50 pips. If the price moves even lower after that, the general area of 1.0130 could present a buying opportunity. Exact entries will depend on how the action unfolds.

The AUD-NZD has been consolidating for a while, following an uptrend. This trading range presents a straddle trade opportunity, with 150 pips objective either way. Because this is based on the intermediate term chart, I do not expect speedy resolution here. In early trading, gaps are possible, something to pay attention to. After that, I might take it easy for the rest of the week. We have at least five central banks’ policy meetings, the EU summit and many other important developments, like the AU employment data. At any time a new development or just a rumor from Europe might send currencies on a wild goose chase. I am considering simply sitting out this mess, and will decide on Monday. Have a great trading week!

Mike K.