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.

On similar note, financial markets in most countries are closed on Monday, but we still have data scheduled from release, including couple of important pieces. The Trade Balance from Japan certainly has the potential to move currencies, especially the Yen. In addition, the Consumer Price Index from China could create a spike in volatility, particularly among the commodity currencies. As always, the Australian Dollar should be most active. I am perfectly content to wait this out and start on Tuesday, with the exception of the JPY, where I might place some sell orders.

Before my hiatus, I discussed a possible sell in the NZD-JPY at around 66.50. Since then, the price rallied but kept returning to this level, making an even more compelling case for shorting this pair. There was a minor breakout on Friday, which I ignored for the reasons mentioned earlier, but now I have a sell at 66.40 looking for at least 100 pips. That said, I would still cancel this trade if conditions remain very thin, meaning very wide spreads. Anything above 10-12 pips suggests lack of participation, the type of environment when whips are possible and even likely.

Another potential trade covered on these pages was a buy in the EUR-CHF. My idea was to go long above 1.2070. The price missed the entry by about two pips and kept falling, eventually testing the 1.20 floor. In response, the SNB promised to defend it with “utmost determination and unlimited Euro buying”. We shall see just how committed they are but I bought the EUR-CHF on Friday at 1.2010. Objective right now is the 1.2070 resistance, risking 30 pips. Realistically, I am prepared to sit on this as long as 2-3 weeks.

Daily chart of the AUD-CAD was suggesting a bearish breakout under 1.0335, which finally materialized. This was not a smooth trade, with the price action less than decisive, but last week it reached 1.0118, just short of my 1.0100 objective. Two more days, which brought a hammer and a doji, convinced me to get out at 1.0224 for 106 pips gain. The main trend remains bearish, but I am done here for now.

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.

European currencies fared better, showing smaller losses. However, they experienced a selloff of their own once the London session started. Once again, the PMI data was the culprit. Preliminary PMI numbers from Germany and the Eurozone disappointed both Manufacturing and Services. Results for all four indexes released today were disappointing, not only below the forecast, but also under results from last month. The Euro, Franc and Pound suffered large losses versus both the Dollar and the Yen. Moves of 100+ pips were the norm.

Selloff of currencies in relation to the Yen played into my hands as I was looking for another short in the GBP-JPY. It happened sooner than expected, but at the anticipated level, or 132.10. After a slow start, the beast went on a prawl following the PMI releases in Europe, and the trade reached its 80 pips objective shortly after. All said, the GBP-JPY lost 350 pips in two days, which could be a start of a larger correction.

By now, the GBP-JPY pulled back to the 130 handle, which offers multiple supports – one is the previous high, and the other is in form of the 100 SMA on the 4H chart. The preferred development would be a rebound from here, confirming importance of this support, which would make eventual bearish breakout more significant. If these conditions are met, the next price swing down could easily be 200 fast pips. It will be interesting to see what currencies do during first half of trading day on Friday. The economic calendar is empty, with no scheduled data releases until the US session, meaning that volatility could be much lower from today. I will try my usual trades following the London opening, with objective in the 30-50 pips range, depending on which currency pair is involved.

Mike K.

The beast started to indicate reversal on the 15 M chart, which I discussed here yesterday. My plan was to sell it at 132.20, with objective of 60 pips. The price continued higher and I kept moving the sell order to just under the latest minor low. At last, in earlier trading today, the price dropped sharply lower, filling mu order at 132.91. The objective remained at 60 pips and it was reached short time ago. Now it is time to look at a little larger-scale chart and see if another selling opportunity presents itself there.

On the hourly chart, the GBP-JPY appears to have found support at around 132.20. I would like to see a small rebound from here, lasting at least several hours. If that happens, new low would indicate shorting opportunity with objective of about 70-80 pips. At the same time, the daily chart of GBP-JPY is showing a possible bearish reversal candlestick pattern, but we must wait for the day to close before taking it into consideration. I will try to cover that development in the next post.

Mike K.

Things changed shortly after, when BHP Billiton, the world’s biggest miner, raised concerns about the possibility of a sharp slowdown in demand from China, its top metals consumer. No hard numbers were released, but all of a sudden, everybody remembered that earlier this month China cut its 2012 growth target to an eight-year low of 7.5%. That was enough to send the Australian Dollar, and the other commodity currencies sharply lower. We still have few hours of trading left, and it will be interesting to see if there is another price swing down.

On Sunday, I discussed a possible trade in the AUD-CAD, looking for a short-term bearish reversal using the hourly chart. I sold it at 1.0504, following first hourly bearish candlestick. The price movement here was relatively slow, but eventually the trade brought a profit of 30 pips. I could have held out for another 10 pips, but in my mind the trade had already been taking too long, so pocketing gains was the right thing to do. BTW, another short trade in this pair in this pair, using the daily chart is still possible.

From a shorter-term perspective, I am looking for a trade in the GBP-JPY. On the 15 M charts, the price appears to be forming a bearish reversal, with the latest low at 132.24. I want to sell it at 132.20 with 60 pips objective. If I am right, this could happen relatively fast, as it often does in this pair.

Mike K.

For this patter to become official, the EUR-AUD must advance above the high of 1.2616. It is not only a resistance here, but crossing this level would also complete the Cup with Handle pattern. At this point, the EUR-AUD would be officially, from a technical perspective, in an uptrend, with a target of around 1.2950 or so.

Rebounding from a steep correction, the CAD-CHF returned to its prior high for the trend at 0.9400. Couple of weeks ago, the price found support at the 50% Fibonacci retracement level or 0.8934. This confirmed the bullish sentiment, in particular when combined with rising volatility, as shown by the ATR.

Now the CAD must close above the 0.94 handle, in order to continue its rise. The ADX is rising, supporting a trend gaining momentum, and the price is above all important support levels. However, breaking key levels is not always easy, so we must on careful of potential fake breakout. The CAD-CHF is likely to attempt a move soon, perhaps even today.

All of the Japanese Yen pairs have been advancing strongly for several months now and the NZD-JPY is no exception. Here the price gained over 1100 pips, reaching as high as 68.32. At this point, however, this pair went through its first significant correction of the uptrend and dropped to 65.31, before recovering to the 68.33 on Wednesday.

For the rally to continue, the NZD-JPY must close above this level on daily basis, which could prove difficult. The RSI developed a divergence, suggesting that the trend is not as strong. Another indicator, the ADX is in concurrence, having gone flat and not rising any longer. All this points towards a continuation period in the NZD-JPY, even if the general sentiment is still bullish.

Mike K.

The rally in the EUR-CAD, which lifted it from 1.2875 to 1.3479, hit an obstacle last week. It came as a combination of things, which included the 100 SMA, previous resistance level and overextended price. Bollinger bands, with the price clearly above, demonstrated that particular aspect. A bearish candlestick pattern, the dark cloud cover, marked the turning point.

By now, the EUR-CAD retreated to 1.3025, where it found an earlier established support. The price movement is likely to slow down now, trapping this pair in a consolidation, also defined before the latest advance. We should expect smaller price swings, within the 1.3025-1.3241 range. Eventual breakout will probably determine the next direction of the EUR-CAD.

AUD-JPY.

Among the best performing currency pairs in 2012, the AUD-JPY, the AUD-JPY has shown significant gains. Last week it reached as high as 87.99, where it encountered a strong resistance. Together with severely oversold RSI indicator, that proved too difficult to cross, at least for now. The price developed a reversal pattern and turned south, touching 84.80 in early Wednesday trading.

While this correction appears sharp, it is of normal proportions, considering the size of the preceding rally. In fact, it might not be much larger. It depends what happens at the next supported level, or the 84 area. We should watch carefully, because the AUD-JPY could resume the uptrend from there. Otherwise, the price will head for the 81 handle, where the main trendline is waiting.

GBP-NZD.

Finally, after a prolonged slowdown, the GBP-NZD started to increase in volatility. The price moved higher, taking cue from multiple divergences with technical indicators. On Monday, in one swift jump, the GBP-NZD broke the minor resistance at 1.9130. It continued to advance on Tuesday, reaching 1.9483, almost the implied resistance of the 1.95 level.

Here things get tricky for this rally. The price developed a large shooting star, which is a bearish candlestick reversal pattern, probably marking the extent of this run up. For a full-blown reversal, we need to see another large bearish candlestick on Wednesday, now in early stages of formation. The short-term direction of the GBP-NZD depends on how the price will close today.

CHF-JPY.

In line with most other Japanese yen pairs, the CHF-JPY hit an important high last week. Its impressive advance pushed the price to 90.23, a resistance level from an earlier high. There the rally lost momentum, and the CHF-JPY started to pull back. In early Wednesday trading, this correction touched as low as 87.67.

So far, the price has not reached any established support levels. Because of that, we can use the Fibonacci retracement levels for some possibilities. The 38% is at 87.00, while the 50% is at 85.70. If the CHF-JPY is going to retain the general bullish sentiment, one of these levels should become a support. If not, this correction could turn into a bearish reversal, but we need to see more price development.

Mike K.

I was looking for short-term and admittedly smaller corrections in the Yen pairs in early trading. In case of the AUD-JPY, my objective was only 50 pips. The signal was a bearish reversal candlestick pattern on hourly chart, which turned out to be a harami. It followed a suitably large, but short-lived continuation, exactly what I sought. Needless to say, it captured only a portion of the potential, although that was mitigated by taking more trades.

Since all of the JPY crosses presented virtually the same opportunity, I made few more trades, including this one in the beast. Because the GBP-JPY moves more under most circumstances, my objective was more ambitious. In the end, I settled on 75 pips gain here. I would expect these pairs to consolidate now for some time and then we shall see what is likely to happen next.

Mike K.

The G-20 club is trying to line up a deal in April on a second global rescue package worth nearly $2 trillion. It is intended to stop the Eurozone sovereign debt crisis from spreading, threatening what some see as global recovery under way. At first, Europe must agree to merge its temporary and permanent bailout vehicles. That would create a $1 trillion fund and enable other G20 countries to meet the IMF’s request for $500-$600 billion in new resources, on top of its current $358 billion in funds. Combined, this would total around $1.95 trillion in resources. Germany is the key player to combining the two European funds, something they have been long opposed to do. Now country officials say that Germany will make a decision on the matter sometime in March. Once that happens, the Group of 20 members will be obligated to put additional money into the International Monetary Fund. Unless they find a new reason to not to do it…

The Japanese Yen was among the biggest stories in the Forex market last week. It is finally falling against the US Dollar, something that has been happening in relation to other currencies for some time now. Last week brought acceleration in these trends, with the AUD-JPY advancing to 86.85. Because the price closed at the daily extreme on Friday, I will be looking for a short-term reversal here, using the hourly chart. My sell signal should be a bearish reversal candlestick, with objective of at least 50 pips. Details will have to be worked out once the trading gets under way. Virtually all of JPY pairs are similar, so all of them are possible candidates for this trade.

Another currency that made waves recently is the Swiss Franc. It appears the Swissy is regaining its status as a safe haven, the only one around, registering strong gains. Even the Euro, in spite of own rally, was not immune and fell to about 1.2040 versus the Franc. This creates a major headache for the SNB, now faced with a prospect of making good on its promise of defending the 1.2000 floor. I bought the EUR-CHF shortly before Friday closing, expecting the support to hold. Objective is 50 pips, but the position is of very small size as is normal for “gut feeling” trades. Have a great trading week!

Mike K.