Early Monday brings events, which could determine the intermediate-term fate of the Australian Dollar. First, the inflation data in form of the Producer Price Index for Q1 is set for release. The forecast calls for annual decline to 2.2% from 2.9%. Falling inflation makes it easier for central bank to cut interest rates, thus be detrimental to the AUD as carry trade instrument. However, the real market mover is the Manufacturing PMI from China, coming one hour later. Even though this is a flash, or preliminary reading, markets will pay attention. In recent months, this indicator created a lot of volatility in the AUD, with spreads often jumping to 20-30 pips at the release and immediate moves in range of 60-80 pips. Even though this is a flash, or preliminary, reading markets will pay attention. If the PMI rises above latest result of 48.3, preferably above 50.0, the Australian Dollar should rally. At the same time, if the PMI disappoints, the AUD could go into a sharp selloff.

Interestingly, from technical perspective the Australian Dollar is at important level. In case of the AUD-JPY, it is trying hard to turn bullish. The price is right at the key, multiple resistance of 84.75. If today’s data forces a successful breakout above this resistance, the price could rally about 200 pips, with time of course. However, if the breakout fails immediately, a significant selloff under 84.00 is likely to happen fast. The story is similar across most of AUD pairs.

The AUD-USD is a little further behind, but after establishing a solid resistance at 1.0300, it is trying to rally. Here, the immediate resistance is at 1.0390, which, if broken, should clear the path for advance to 1.0450 in the short-term. On even more ambitions note, if today’s data proves to be truly positive, the AUD-USD could easily extend gains to about 1.0600 within days. Alternatively, a failed breakout above 1.0390 will probably sink the price back to 1.0300 or even below. Either way, early trading today could be volatile.

Mike K.

Markets clearly do not have much faith in Spain, fearing higher than promised deficit or even possible bailout. In the past two weeks, Spain has had a higher yield than Italy, which just a month ago was the economy most at risk following the bailouts of Greece, Ireland and Portugal. On Friday, the Italian 10-year yield was 0.4 percentage points below Spain’s at 5.14%. This happened in spite the fact that European banks have plenty of capital from the LTRO and were expected to use it for sovereign bond purchases. After all, at 5% these are attractive yields in the low-rate environment across the globe. We should watch the 5.5% yield level, as a move above could spell real trouble for Spain and the Euro, perhaps as early as this week.

Last week I discussed trades in the GBP-JPY, and now it could be a good time for more short trades in Yen crosses. The NZD-JPY, for example, might be a decent sell under 66.50 using the hourly chart. Since the price closed well above 67.00 on Friday, it could take some time before this trade happens. As for shorter-term activities, I will look for gaps at the opening, and try to play them, if they develop. Have a great trading week!

Mike K.

That leaves the Swiss National Bank. In Switzerland, financial authorities are under intense pressure to weaken the Franc. Recently, though, the CHF became stronger across the board, except the EUR-CHF where it is stuck at just above 1.20. It is the “floor”, which the SNB promised to defend. The central bank is likely to threaten additional actions in order to keep the EUR-CHF above this level. It remains to be seen exactly what the bank might do, but chances are the SNB will act before the other CB’s do.

While on the subject of the EUR-CHF, we can see that it stopped making lower lows. In fact, it the price is drifting slightly higher, suggesting a possible bullish move ahead. The price has been trying to turn north for some time, without much luck. It could happen soon, with the volatility here pathetically low (the ATR on 4H chart about five pips)! I am interested in buying it at 1.2064, with objective of 1.2100. The target is small, but so are the risks, thus making it a trade with some merits.

During hours following the opening, I will look for a possible short-term reversal in the GBP-USD. Friday brought a strong selloff in this pair, closing near the low for the day. A rebound in early hours is likely, triggered by a bullish candlestick pattern on the hourly chart. Objective will be in the 40-50 pips range, depending on details once the set up is formed. In addition, gaps are always possible, something I am always looking for. 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.

Other developments, which will move currencies, not included in the standard calendar, are new debt auctions. We have two scheduled for later this week. Sales of German 10-year bonds on Wednesday and a French sale on Thursday will be the year’s first tests of Eurozone borrowing conditions, as a potential recession in the 17-nation bloc threatens to further roil debt markets. German auction in December was disappointing so these two sales could set the tone for what happens in early part of the year. In case of the French auction, it will be closely watched by rating agencies. All of them have been threatening AAA status of France, and weak results on Thursday could just push them in that direction, sending currencies on a run.

I will not worry about direction at this point, but rather try a simple straddle breakout trade. The USD-CHF is not only historically my favorite instrument to do that following holidays, it is also exceptionally tight today. I will disregard the long tail from the opening, because it came in as a response to earthquake in Tokyo, only to reverse soon after no damage was reported. Combined with very thin markets I consider it a non-issue. At any rate, with support/resistance levels where they are, objectives here are small only 40 pips either way.

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.

Meanwhile one of Italian newspapers, La Stampa, reported that the IMF has prepared a rescue plan for Italy. According to the article, loan of between 400 billion and 600 billion Euros is in the work, which would give Italy a window of 12 to 18 months to implement budget reforms. Interest rates on these loans would be in the range of 4% to 5%, making it easier for Italy to refinance maturing debt. Due to the enormous volume of the loans, the IMF would need help from the ECU and possibly other sources. So far, this is a rumor, not much more than “market talk” and still needs to be officially confirmed by the IMF. We will find out more this week.

A week ago, I looked at the NZD-USD on the daily chart, because it was approaching the main support at 0.7630. I did not intend new trades, just wanted to see how the price reacts around that level. So far, the NZD-USD moved under it, but in the last couple of trading sessions the speed of decline slowed down considerably, creating a divergence with the MACD. The commodity currencies showed strength relative to their European counterparts, suggesting that this particular bearish price swing might have see its best days. A rally in “risk” could be around the corner. To be sure, there is no technical reason to buy the NZD-USD yet. However, if a strong bullish candlestick pattern emerges here, this pair could easily climb to 0.7750 or so within few days.

Unlike the Euro, the AUD-USD did not make a new low on Friday, but rather developed a flat consolidation area. While the trend is bearish, the price could move either way from this range. The size of this consolidation indicates a 100-120 pips swing after the breakout, regardless of consolidation. I will treat this situation as a stop and reverse play, because there is always a possibility for a fake breakout.

The British Pound made a new low against the Dollar on Friday, and close near that extreme. This sets up a short-term reversal trade in early trading. For that, I need to see a bullish candlestick reversal pattern on the hourly chart. Since I am looking for short-term play here, objective will be small, about 50 pips, depending on how exactly the action unfolds. On balance, while the USD is strong now, chances for a “risk” rally or a rebound, this week are good. Have great trading week!

Mike K.

Yields on Italian securities jumped once again. This time, the focus was in short-term securities, as the Italian government auctioned 6-months instruments. The average yield jumped to 6.504%, a huge difference from 3.535% just a month ago. At the same time, the yield on the benchmark 10-year bonds returned to above the 7% threshold, while S&P cut Belgium’s credit rating by one level to AA. This in itself is not of great significance, because among the 3 rating agencies and 15 EU countries, these small downgrades are becoming of secondary importance – everybody expects them.

The USD-CHF, my favorite pair for the “turkey” trade, had a decent rally. Nothing major, in line with the volatility from recent weeks, only that the move was direction and appears large when compared to the earlier consolidation. As mentioned in the last post I was only looking for 70 pips here and this objective was met. One should take here that in spite of lousy news, the common currency lost fewer pips than the Swissy.

Another currency pair discussed for this trade was the AUD-JPY. Rather to my surprise, the breakout here was also bullish, initiating the buy order of my straddle. Smaller previous price swing warranted appropriately smaller objective, 50 pips. I find it interesting that the AUD and NZD were not as weak as their European counterparts. For now, it has been only one day phenomenon, but if we see it again on Monday, it could mean a start of a bounce in “risk”. Have a great weekend!

Mike K.

It is one thing that everybody watches yields of the countries in trouble, like Italy, Greece and Spain. Nevertheless, it seems that in EU there is only one place to park money safely – Germany. Investors are increasingly buying those securities, pushing interest rates of 2-year issues to an all time low of 2.95%. That comes at expense of other debt, which is being sold, thus inflating the yields. Even countries perceived as safe are having hard time auctioning instruments on favorable conditions. Belgium, for example sold EUR 2.73 billion of bills today, below the EUR 3.2 billion it targeted to raise. In the process, the Belgian-German yield spread increased by 32 basis points to 3.13% the highest level since the introduction of the common currency. That is where movement in currencies, especially “risk currencies” is decided now – European debt yields.

Meanwhile, trading goes on and unless somebody has a crystal ball, charts must be used. The intermediate term chart of the EUR-CAD suggests a coming selloff. The price formed a solid support at 1.3775, which, if broken, should allow for a far larger depreciation, I am interested in about 150 pips, if the support gives ways, with a sell order at 1.3770. With any luck, the objective will be met within a week of the trade initiation (if it happens).

A week ago, the GBP-CHF had a nice breakout, bringing a few pips, followed by a consolidation. By now, this congestion is becoming long, especially since it is so narrow, spanning only 150 pips or so. This increases the probability of another directional move soon. Because the latest move was bullish, this direction is favored again. I have a buy order at 1.4575, with objective of 1.4700. This is also an intermediate term chart, so it could take some time….

Mike K.

Most of large currency hedge funds and similar trading programs tend to make longer-term large trades. Depending on prevailing market conditions, these could be in carry trades, in currencies like the AUD, BRL, NZD or big positions in safe haven currencies. Those type of trades can be maintained for months, holding period suitable for institutions. Unfortunately for them, strategies like those are not working now, and trades must be either closed with large loses, or remain underperforming for weeks, even months before turning around.

While the Index has not been impressive since late 1990’s, late 2011 may prove the worst in a long time. Carry trades are in shambles, and suffered even more last week. The safe havens lost their safety factors, with the CHF off the list for now. Just yesterday, during annual meeting of the International Monetary Fund and the World Bank inWashington, Hildebrand said the SNB “We will defend the EUR-CHF cap with the utmost determination.” Since they made good on these threats to date, there is no reason to believe the SNB will let up now. Contrary to popular belief, the Nordic currencies are no replacement for this safe haven, and neither are the Asian currencies. Even the Japanese Yen may lose this status, if the BoJ decides to follow in the SNB footsteps. This means that currency hedge funds will have to become more creative, or everybody will be long the USD very soon.

Mike K.