While many in Switzerland support these meassures, some are warning about unintended consequences, saying that Franc limit against the Euro may cause the country’s economy to overheat if authorities are not vigilant to its effects. For example, property prices have increased in Switzerland, aided by near zero rates and demand from foreigners looking for employment. This could be mitigated to some degree by increasing the benchmark rate in order to prevent a property bubble. However, such move would put upward pressure on the Swiss Franc and jeopardize the 1.20 EUR-CHF limit introduced in September to fight deflation. Clearly, the SNB will have to walk a fine line.

The EUR-CHF is in a precarious position, having just left its prolonged trading range. At present, there is no real support on the daily chart, other than the psychological importance of the 1.20 level, backed up by the SNB’s threat. If the central bank does not act, or only delays its involvement, the price can easily slip to 1.16 in short order. While this is playing out, I will focus on short-term trading on Friday, mostly in the USD pairs at the start on the London session. They show good volatility and could offer decent opportunities.

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.

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.

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.

Initial response from the markets was Euro positive, with the EUR-USD rallying to 1.3460, but that changed quickly. The sentiment took a sharp turn for the worse and the risk appetite evaporated. Some pairs, like the AUD-USD collapsed over 200 pips, while others experienced less painful selloffs. In case of the EUR-USD, the drop was about 170 pips, to 1.3290, before a rebound set in. Many speculate that the ECB did not do enough, although there is no agreement on what precisely the central should have done. Many “experts” (people interviewed by media outlets) simply stated that “markets expected more”, whatever that means. On a personal note, I think that only a promise of unlimited purchase of sovereign debt would make “markets happy”.

More likely explanation to collapse of risk currencies were the pessimistic comments from EU heads of states, starting the 2-day summit. It appears they are not convinced about viability of this meeting.

Austrian PM: basis for agreement on EU treaty change not very good.

Finnish PM: favour stricter rules, treaty change not the only way.

Swedish PM: EU treaty change too time-consuming.

Danish PM: can back treaty change in finding a solution.

However, we should note that these are just early statements, with main session tomorrow. Besides, everybody has unrealistic expectations. Certainly, Friday itself will not bring a solution to a problem, but what we need to see is an agreement in principle to some changes. More importantly, the participants must establish a VIABLE timeframe for when and how suggested changes should be implemented. Realistic outlook should be in a range of 6 to 18 months. More volatility is sure follow, no matter the outcome, but perhaps over the weekend people will have time to digest the news and plan their next moves, leading to a little longer price swings next week.

Well, here is one way to solve EU’s problems, and later on ours, too.

I am quite happy with my decision to lay low this week, do not feel like I missed anything. For Friday, though, I will be more active, in a manner resembling last week. First, short-term trades at the start of the London session. After that, I will wait for major announcements from the summit and, once trends emerge, try to ride them, similar to the NFP release a week ago.

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.

Over time, there were additional rumors, neither confirmed nor denied by SNB officials, about raising this line in the sand higher, to 1.25 and perhaps even 1.30. Most business groups in Switzerland maintain that the Franc is still overpriced, which make additional action by the SNB not only warranted but even necessary. However, having already delivered a shock to the markets, the central bank is likely to resist external pressures, in order to ascertain its independence. As a matter of fact, that was the message one of its board members delivered in a recent interview. Besides, in spite of global turmoil, the CHF is not the safe haven it once was, so there is no urgent need for the SNB to act again.

This could change in early December. On the first of that month, the Economics Ministry will release third-quarter gross domestic product figures. Economists expect to see a picture of either stagnating or even contracting economy, which will demand some action from the central bank. That does not mean that it must result in more Franc weakening steps, but it will be one of the widely discussed options. We should not be surprised if the SNB indeed decides to raise the EUR-CHF floor to 1.30, because the 1.25 level with the price currently almost touching it would not make much sense.

It remains to be seen what, if anything, the SNB decides to do. Meanwhile, I have had couple of buy orders in the Swiss Franc pairs for some time, in the GBP-CHF and the EUR-CHF. Both of them use the intermediate term chart, and are sitting just above the latest highs. In case of the EUR-CHF that is at 1.2480. The price is not really moving, staying in a consolidation, but the general set up remain valid so the orders are still active.

The Japanese yen is moving in tight ranges. It is trying to get stronger, pushing the crosses down, yet participants seem to be afraid of possible BoJ intervention. As a result, we have short-term consolidations, like this one on hourly chart of the GBP-JPY. This pair has been within a 100 pips range for the last few days, so chances are it will start moving soon. I am not convinced about the direction here, so a straddle play makes more sense here, including a stop and reverse principle. The objective will be a modest (for the beast) 100 pips.

The Kiwi finds itself in an interesting spot on a daily chart. It is clearly the weakest of the majors, leading this current selloff versus the US Dollar. In this capacity, it could also mark a reversal of this trend. It is approaching an important support level at 0.7467, the previous low, and if it bounces there, all other majors might do the same. I do not really plan to do anything, want to see what happens there first, because it might just be the harbinger for all risk currencies – rebound or a much longer downtrend. From a shorter perspective, I will look for opening gaps and, if present, try to exploit them. Have a great trading week!

Mike K.

There is a problem with this scenario. Own IMF guidelines say that a currency should be widely used for international transactions and in national foreign exchange reserves before joining the basket. This means it must be convertible, or floating. Because the CNY is not, it cannot be included in the basket, or the criteria will have to be changed. A consideration is also given to the Brazilian Real and the Swiss Franc, but in spite of the talk, we should not expect changes soon. Especially on the expansion part – IMF wants to keep the SDR relatively small to avoid adding undue costs and complexity for its users. Nonetheless, just talking about adjustments indicates that the IMF sees a need for changes, so be 2015 the SDR is likely be different from its present form.

Friday was shaping up to be interesting for the risk currencies, because of the Italian situation. Government of that country was expected to show willingness to employ austerity measures. It was a foregone conclusion they would do it, the problem is future implementation. Regardless, markets took is positively. I was not about to guess how currencies would react, and placed some straddle orders at the start of London session. In case of the EUR-USD that translated to a buy at 1.3650, with the sell order unfilled. After a long consolidation, the Euro rallied strongly and the price met my target of 50 pips. I was amazed at just how strong this rally was, considering that the situation in Europe is far from solved. It is a repeat of early stages of crisis in Greece, when as soon as one positive step was taken, an even bigger disappointment followed. Chances are, Italy will be no different…. Have a great weekend!

Mike K.

Now the question is – does this have a staying power? Initial observations suggest that it does not. The USD-JPY already gave up about 175 pips of those gains and other crosses are not far behind, as if already suffering from intervention hangover. It seems that Japanese authorities should change their tactics, and continue with selling the Yen for either few days in a row or on every USD-JPY. Given history of past few interventions, markets might not take them seriously and speculators will simply use this jump as an opportunity to sell. We will see what road the BoJ takes.

I was looking to go short the currencies that had registered tremendous gains last week, which included the AUD-USD. The price started to move slowly down, and made a minor at 1.0665, before a small recovery. That point offered a good selling spot with about 65 pips objective. However, once the move came it was caused by intervention, so I lifted the T/P order and decided to see where this sell off would end. At 1.0505-10, there was an old resistance, which was likely to turn into a support, a reasonable objective. After breaking under 1.0550 the selloff slowed down, as if running out of steam, so I closed the trade for 134 pips gain.

The intervention, with its ripple effect on all other major currency pairs, distorted most intermediate term charts. I am going to let the dust settle and shift into very short-term trading for Tuesday, mostly London opening. With all the big announcements still to come this week, like the RBA and FED rate decisions, G20 meeting, plenty of employment releases, we could be for a very volatile stretch. In my view, markets will start showing some hesitation about the Euro deal from last week, and the general action in currencies will become very choppy.

Mike K.

On a plus side, there are reports of Japan expressing interest in contributing to euro rescue fund. The logic goes that if the Euro stabilizes, the need for safe havens will diminish, weakening the Japanese Yen. It appears though, officials want to wait a little longer, to see how the details mentioned before work out. Meanwhile, they are busy threatening another intervention in Yen. Intervention rhetoric has become harsher since the USD-JPY dropped to an all time low, albeit by a small margin. However, should the selloff continue, to 70.00 or so, chances for the BoJ will become more likely.

The Australian Dollar benefited the most from the change in sentiment in the currencies. My guess is its behavior will dictate what happens in the other pairs, too, so we can treat it as a catalyst. Realistically, the AUD-USD is ready for a correction. After all, it has rallied over 1300 pips in almost a straight move, without a meaningful pullback. Now it faces a resistance at 1.0765, which could lead to a 200-300+ pips correction. On the daily chart, we would need to see some kind of bearish reversal candlestick pattern. Because none is present yet, we have to wait for one to develop. Otherwise, this rally is on targeting the all time high at 1.1080.

Shorter-term charts do not offer high probability opportunities at the moment. On Friday, prices behaved in a manner not suitable for my typical weekend trades, so no action right now. Of course, the opening could present opportunities in form of gaps, so I will watch it. Otherwise, it is a waiting game, or trading very short-term charts (5-15m) once the markets open. Have a great trading week!

Mike K.