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.

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.

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.

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.

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.

The interim central bank chief Thomas Jordan is unlikely to implement important changes in present policy. If anything, he will be under even greater pressure to raise the floor. Many in Switzerland are demanding the EUR-CHF to be at 1.30 even 1.40. This probably will not happen either, at least not immediately. For now, we should expect the SNB to stick with 1.20 floor, although it does not mean an intervention at precisely that level. The price could easily drop perhaps 1.18 before any action is taken. On the other hand, the SNB might start a “soft” intervention now and keep purchasing the Euro in small dozes around the clock without major spikes. Whatever happens, “buying the Euro in unlimited quantities” is still its official policy, which unlikely to change in the short term.

The EUR-CHF is flirting with 1.21 level, possibly on its way to 1.20. I do not plan to buy it at 1.20 solely based on what the SNB is saying, but IF the price dips to 1.20-1.19 and IF there are technical reasons on the 4H/Daily chart to go long, it might not be a bad idea. After all being on the side of the central bank might be positive. Plenty of “ifs” here, so no real plan yet, but a consideration should the price drop lower.

Trade from last post involved the USD-CAD. Plan was to see initial upward continuation, followed by a bearish reversal candlestick on the hourly chart, serving as the entry signal. There was a shooting star, closing at 1.0304, which became my entry. Probably should have waited four more hours for the bearish engulfing line, but that would have produced almost identical entry. It took a while for the USD-CAD reach the 40 pips objective; however, the trade was relatively easy and worked out as planned.

Mike K.

Earlier this week I discussed a simple non-directional play in the USD-CHF. I was looking for a breakout from the tight range the price formed on Monday. The move turned out to be down, triggering my sell order and rapidly reaching the 40 pips objective. Good way to start the year.

There are all kinds of things happening in almost all currency pairs. The uncertainty is great and large moves are possible in both directions everywhere we look. And the volatility is likely to increase. I have a lot trades all over the place mostly using shorter-term charts. One of the new trades I am considering is in the GBP-CAD pair. Here going long at 1.5893 could catch a nice rally, if it happens. My objective is 100 pips, hopefully fast.

Mike K.

This is the chart of silver as it appeared in the “Ready to Sell Silver” post. I was looking at the weekly chart considering it to be in a blowout top and about to collapse. The move came few hours after the post was published, triggering the trade right after weekend opening. Silver fell sharply and the trade was closed later that week for 10 full points’ profit. Very rare occurrence, to be able to even catch such large move in this market so fast. Trade of the year, no doubt.

Another very good trade was in the USD-CHF in August. At that time, this pair had been falling seemingly forever, dropping over 400 pips on the last day of the selloff. This was a clear exhaustion move in an already severely oversold market. I went long at 0.7117   looking for a few hundred pips. Turned out to be a good decision, entering this market long near the all time low.

I adjusted my views as the situation unfolded, closing half of the trade 0.7517 for 400 pips gain and exiting the balance 0.7825. Of course, the USD-CHF rallied much higher in following months, but 700 pips in a few days during that period of high uncertainty was a great result.

I can only hope that in 2012 markets present similar opportunities like these. However, the truth is that markets will offer opportunities, but the trick is in recognizing them and then taking appropriate actions. Unfortunately, that is much easier said than done even after years of trading. A college degree is not necessary to trade currencies, but studying math and earning a GED online may help.Best of luck to everybody in 2012!

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.

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.