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.

Now Japan feels the threat of similar action. Her prime minister, attempting to build support for painful fiscal reforms, said Saturday that the country should be alarmed by ratings cuts in Europe and must tackle its massive public debts to avoid becoming the next target. Noda says Japan urgently needs to reduce its debt burden as the nation ages and its labor force shrinks, putting a greater burden on the social security and tax systems. He has promised to submit a bill by the end of March to raise the 5 percent sales tax in two stages, to 8 percent in 2014 and to 10 percent by 2015. To be fair, most of Japanese debt is held internally and not internationally, but another downgrade could be painful and seemingly official feel the heat.

Meanwhile in France, the Prime Minister Fillon said Saturday his country would push ahead with cost-cutting measures. The downgrade confirmed his conservative government’s plans for more reforms to bring down debts, despite worries that more austerity measures could suffocate growth. However, the government would not adjust the budget yet, saying it had been devised with an assumption of higher borrowing costs. This is typical of what we have been hearing from Europe in the last two years – plenty of talk but very little practical steps. In the end, Friday’s downgrades provide Germany with even bigger clout than before which could have a profound impact on what the EU will do to combat the problem (if they ever do anything).

Few days ago, I discussed a weekly chart of the EUR-NZD, which showed a strong possibility of MACD divergence. For a while, the weekly chart almost produced a reversal pattern, but a steep selloff on Friday closed at almost the weekly low. However, this choppiness created another probable MACD divergence, this time on the 4H chart. The divergence itself is almost guaranteed now, as long as the price makes a new low, but the EUR-NZD still needs to show a bullish reversal pattern. I would like to see a hammer or a bullish engulfing line, which would act as the trigger here, with at least 200 pips objective.

Meanwhile the CAD-CHF has consolidated, building a potential Head and Shoulders reversal on the intermediate term chart. For the pattern complete, the price must move under the latest low of 0.9238. I have a sell order at 0.9230, targeting 100 pips if it is initiated. Should the advance continue I would look for signs of resistance at 0.9400. Another pullback from that level could create a buying opportunity on a follow up breakout. As for immediate concerns, opening gaps could form and those are often exploitable. Have a great trading week!

Mike K.

Chances are that the summit in Brussels on January 30 will not produce agreement on this issue. In such case, Mr. Sarkozy will try to impose the Tobin tax unilaterally before the April presidential election in France. French business was quick to distance itself from the idea. Paris Europlace, a financial markets association, warned that unilateral application of this tax would drive banking, insurance and asset management business out of Paris, and benefit of other large financial centers. It could even hurt Sarkozy’s reelection bid. Ultimately, though, it will further sour European unity at a time when it is most needed.

The USD showed strong gains on Friday, especially against the Canadian Dollar, which fell of confusing employment numbers. While the Net Change in Employment improved with 17.5K new jobs, even higher than the projected 15 K, the Unemployment Rate somehow increased during this time to 7.5% from 7.4%. How is it possible? Beats me, but the USD-CAD had a nice rally and closed at 1.0283 just shy of the daily high. This, it turn, sets up a short-term reversal trade, a sell in this case. I want to see a bearish reversal candlestick pattern on hourly chart, looking for a 40 pips correction.

After a bullish spike on the first trading day of the year, the Euro fell for the rest of the week. Fundamentally, there are few, if any reasons to by the common currency, but it could be getting oversold for now. Such is the case in the EUR-NZD. At 1.6287, the price is approaching the previous low of 1.6201, creating a possible MACD divergence on the weekly chart. It is a chart to watch for me, in case the divergence actually develops. That would be confirmed by a strong bullish reversal pattern. Because this is a weekly chart, we have to wait at least a week for the next candle to form, maybe even longer. If it does, the price could easily recover to 1.70 or so.

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.

In the last post, I discussed a few currency pairs, which had seen large selloffs recently. It looked to me they were ready for a change of direction within the next few days. In case of the NZD-USD, I used a daily chart, which showed an MACD divergence. It still needed a bullish candlestick on a daily chart in order to provide an entry point. On Monday, the NZD-USD rallied to as high 0.7572, a bullish day. I went long at 0.7576, just above that high and closed it short time ago for a gain of 69 pips. Even though I think this pair has a chance to advance another 100 pips or so, the large, unfilled gap from early Monday made me nervous. Price tends to return to gaps and it could happen today or next week. Since I do not know when, I decided to take profits instead of going through a prolonged drawdown. From now on, I am tracking the hourly chart of the NZD-USD with a sell order just under the latest low, 0.7588 at present, and will adjust it if the rally continues. It would be fair to say, that in spite of correct analysis I failed to maximize profit, but such is trading life.

Another trade, which produced less pips than it should have was in the AUD-USD. This chart shows price movement before other brokers are open, hence no gap visible on most other charts. Plan was to trade with the direction of the breakout, which happened to be long, with the entry at 0.9790. My objective was 100 pips and the AUD-USD reached 0.9888 in this move, just 2 pips short, before pulling back. As I often do in situations like this one, trade was closed, bringing 62 pips. By now, the AUD-USD is getting close to the 1.01 handle. Still, 62 pips is not a bad gain, but far short of the potential.

The only trade that actually worked out as planned (almost) was the buy in the GBP-USD. In this case, I was looking for a long entry after a strong bullish candlestick pattern on the hourly chart. It proved to be a fairly long wait, longer than intended, before a large engulfing line emerged, offering an attractive entry at 1.5510. My objective of 50 pips was met in a short order. On balance, early trading this week was positive it should have been much better.

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.

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.

The article is short on details about specific strategies employed by the funds, but it sounds that these are trend following systems using daily charts. It does not really matter, but this article should serve as a warning for those who are so willing to buy the newest “system” that hits the market, and it seems like there is at least one every day. No strategy works at all time, they are all designed to take advantage of very specific market conditions. While these conditions can last for weeks, months and maybe even years, they will eventually change, rendering the system unusable. As we can see even the largest traders, with access to the best programmers and computers have to tweak, adjust or perhaps abandon their strategies. The same will and does happen to every single computer driven model, the only question is when?

As mentioned yesterday, I was looking for short-term reversals in the commodity currencies. In case of the USD-CAD, the first hourly candlestick was a bullish one, providing the buy signal at 1.0105. Before entering I was thinking about 40-60 pips objective and eventually settled on 50. Trade worked out nicely, hitting the target in a few hours, fulfilling the premise of short-term reversal. Of course, that reversal turned out to be larger, but that is another story…

Similar situation developed in the “other dollars”, only in reverse. The NZD-USD gapped higher, but the first hourly candlestick was strongly bullish, presenting a potentially good short entry at 0.7892. Here I settled for a smaller, 40 pips objective, which looks puny when compared to the total selloff for the day, but I was trying to catch relatively short-term moves with limited objectives.

Mike K.

Another item on the agenda was participation of private money in bailout of Greece, or “orderly default”. Bankers have offered to stretch the voluntary haircut on Greek debt to 40%, much steeper write downs on their holdings than the 21% losses agreed last July. At the same time, politicians demand the private sector agree to write downs of at least 50 %, down from the 60% floating around yesterday. It appears that parties involved are slowly finding a middle ground, but will they reach a compromise by Wednesday? Moreover, will that be enough to solve all the problems, or simply postpone them?

While the news from Brussels seem to be positive, they may already be priced in the currencies. After all, there was strong rally against the US Dollar on Friday, with most currencies closing at or near extremes for the day. This creates the proper conditions for a short-term reversal trade in early trading on Monday. Among good candidates in the NZD-USD, which closed at 0.8028. The first bearish candlestick reversal pattern on hourly chart will be a sell signal. Details will have to be worked out when it happens, but objective for this trade will be about 40-50 pips. BTW, virtually all other Dollar pairs present similar opportunities.

At the same, this particular situation creates a minor problem in the USD-CAD, where I have a standing sell order at 1.0038. Because now I expect a short-term bounce in early trading, the sell order is suspended, until this is cleared. There is a risk of missing a trade here, but I will take my chances. If I am correct the USD-CAD will establish an even stronger support, and that might be a better short entry a little later. Have a great trading week!

Mike K.