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.

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.

While it sounds good, to date not one Japanese company took advantage of this source of capital. Interestingly, last year Japanese multinationals went on a largest oversee spending spree in at least 12 years, buying about $90 billion worth of foreign companies. Some analysts say that Japanese businesses simply have surplus of funds and do not need to borrow, while others argue they are simply avoiding cumbersome and time consuming government process. Whatever the reason, this program appears to be a failure. There was talk about expanding it, but since there is no interest, it could expire in eight months or so, leaving Japan with intervention as the most viable way to weaken the Yen.

On Sunday, I discussed a short-term reversal trade in the GBP-USD. I was looking for a bearish reversal candlestick pattern on the hourly chart within first few hours of opening. The price unfolded not exactly the way I wanted, with a bearish sign forming immediately after trading started. Regardless, I sold the GBP-USD at 1.5542, seeking 50 pips. My objective was probably too ambitious, the price only dipped to 1.5516 before turning bullish. Since things were not going my way, the trade was closed at 1.5562 or 20 pips loss.

A week ago, I covered CAD-CHF on these pages, or more to the point, its intermediate term chart. My idea was to go short at 0.9230, with 100 pips objective. The price rallied at first but eventually turned south and triggered my order. I closed it earlier today at 0.9163 or 67 pips profit. It is short of target, however, the price dipped much lower and rebounded, so I thought it prudent to pocket some gains and move on.

With the British Pound very strong today, it will be interesting to see if this continues. Some technical developments suggest it will. On the 4H chart of the GBP-CAD, for example, the price is finding repeated resistance at just above 1.5800. The more often this level is tested, the more likely it is to break with a bullish continuation. I have a buy order at 1.5815 looking for 100 pips. With any luck, it could happen before the end of this week…

Mike K.

These talks are not going well. According to some sources, the Greek government has proposed an even larger “haircut” of 68%, meaning a recovery rate of only 32 cents on the Euro. In addition, future interest payments would be lowered, too. There are plenty of conflicting stories, with some suggesting that the original 50% threshold is still valid. We shall see. Whatever it turns out to be, Greece is simply strong-arming, even blackmailing its creditors into taking losses, with only faint hope of actually recovering anything. According to Fitch, Greek default is inevitable and only a matter of time, and any talk to the contrary, including these negotiations is just posturing.

While that farce is playing out, trading goes on no matter what it actually is that drives the markets. In the last post, I discussed a buy in the GBP-JPY. The premise was to go long on a breakout above the latest minor high, with the exact entry at 118.33 and objective of 100 pips. That is what happened, the beast rallied with most of the gains taking place on Thursday. Perhaps this is a start of larger appreciation, but for that one should use the 4H chart, something I will look at later.

Another trade I covered earlier this week was in the EUR-NZD. Here I used the intermediate term chart, which formed a divergence with the MACD. Still needed a bullish candlestick reversal pattern, though, in order to pinpoint the entry. After a considerable wait, an engulfing line developed, providing entry at 1.5927. My objective was 200 pips, which was reached, if just. Later in the day, the EUR-NZD made another run at the high. For Friday, I will focus on short-term at the start of London session, using USD pairs.

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.

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.

There is another market behavior on Thanksgiving, or more to the point, the day after. After the Thursday slowdown, currencies tend to make relatively strong, directional moves. They happen in majors, as well as the Yen pairs. I often trade them as straddles, choosing either highs/lows of Thursday or even tighter ranges. In the above example of the AUD-JPY, there is couple of buy entries, above either the 75.10 or 75.50 resistance levels. Cannot say for sure just yet, because the orders will not be placed for another 8 hours or so.

The USD-CHF pair has been the instrument of choice for me in previous years. Today, the range is relatively wide, so it might not be best suited for the strategy, but it is too early to be sure. Will review the situation in a few hours. I really have no intention to trade actively on Friday, so these orders will have targets assigned to them of between 50 to 70 pips, depending on pair. We shall see what happens. Happy Thanksgiving!

Mike K.

What is next? Most likely, in a typical fashion, yet another group will be formed to try it again. Eventually they will announce a “deal” of only a fraction of the intended size and call it good. Meanwhile, the rating companies will review the US debt situation, and sooner or later downgrade it. After all, there is no plan to to not only repay it, but also even to how to make it smaller. For the time being the USD should still benefit from the flight to safety, but once the Euro situation stabilizes, interest rate in the US will make Italian yields look like chump change – 70’s-80’s all over again.

Yesterday I discussed a trade in the GBP-JPY, which created a tempting trading range on its hourly chart. I did not favor either side for a breakout, choosing instead a straddle principle. The sell order was triggered at 120.82 in early hours on Monday. My objective was only 100 pips, but the price could not penetrate the 120.00 level and rebounded. I decided to pull the plug at 120.24, for a 58 pips gain. At this point, the chart situation has changed so the buy order is no longer valid.

I also decided to exit the balance of my AUD-USD short position. Half of it was closed at parity, and the remainder had a target of 0.9800. Here also the price did not reach its objective, missing it by only 8 pips. I decided to get out, and that turned out to be at 0.9829. Over all, a good trade. The AUD-USD is likely to get weaker still, but from here, I will use smaller magnitude charts.

Mike K.