AUD/USD: We can expect high volatility around CPI data
The market is bearish AUD/USD and today's CPI data could determine whether it stays that way. The market is writing in around a 40% chance of an imminent rate cut and with all other global central banks (bar perhaps the RBNZ) in 'easy' mode, any lower than expected 'weighted mean' CPI would certainly reinforce the rate-cut view.
As usual I'm tending towards the contrarian view and with the market already sitting quite short I see more risk of a nasty short-covering squeeze on a higher number. Even if we do get a lower number, recent lows at .7850 should attract profit takers.
I'd suggest a volatile 50 pip range between .7920/.7970 for this morning's pre-CPI trade. One way or the other, we should see some bigger moves after 11:30 Sydney time.
EUR/USD: Few days range trading ahead
After some massive moves in recent weeks the EUR/USD market can be forgiven for taking a breather. Yesterday's Greek election result was the latest bearish event but the market has regained Friday's closing levels which suggests to me that the bears are tired and will take a break.
Yesterday's lows near 1.1150 are the obvious support levels and any rallies towards 1.1400 will attract trend followers. Trading near the edges of a range like this makes sense to me.
AUD: Important days ahead
Iron ore prices fell sharply again overnight and precious metals also stalled their recent run higher. Short-covering in the EUR/USD elicited a similar reaction from the AUD/USD, which offset the negative metals influence, but it will be very important to see how the Asian market reacts today. Is the market happy to stay short AUD/USD or will it get nervous and test .80 cents?
One of the big French banks put out a sell recommendation in AUD/NZD and that might also have some limited impact.
CPI tomorrow will have the markets full attention, with traders starting to price in the next RBA rate cut. The big risk here in my biased view is that the RBA weighted mean comes in higher than the market's expected 2.2% YoY and we get a severe short-covering rally. Today's reaction to the tumbling iron ore price will tell us plenty about how the market is feeling.
AUD/USD: Edging into fresh long position
- EUR/AUD is bearish to my eye and will head back below 1.3000 in coming months;
- AUD/JPY looks technically very oversold on short-term charts;
- AUD/USD has fallen from above 1.00 to below .80 on the back of supposed tightening US monetary policy which still hasn't happened. Even if/when it does, will it be a case of sell-rumour-buy-fact?
- Yes commodity prices have fallen sharply but the AUD is one of only a few remaining long-term 'store of value' options when it comes to currencies.
Obviously these are all quite macro factors, barring perhaps the AUD/JPY technicals, and who's to say that AUD/USD won't fall to .75 cents and EUR/USD below parity? As always there is an element of risk with picking the right entry level and the right timing, but I'm starting small and will build if I get lucky on these fronts.
EUR opens lower on Greek election result
EUR/USD is trading at 1.1160 in early trade, USD/JPY is at 117.60, cable is at 1.4990 and AUD/USD is .7890.
The anti-austerity, left-leaning Syriza party will win the Greek election but may fall just short of the absolute majority needed.
Next technical support of note in the EUR/USD is at 1.1050.
Liquidity gaps going to be a major issue for FX market in 2015
Don't confuse liquidity gaps with level of turnover. We have had a few days last week where hourly turnover in the EUR was at record levels and these levels are only going to increase. When conditions are fine, massive turnover will continue.
What's of more interest to me is what happens when conditions aren't fine. When the market is caught heavily on one side of a trade and receives a sudden shock (like the SNB). Bank dealing and prop desks aren't there any more in any sort of numbers to pump liquidity in when the proverbial hits the fan. A big level will break, or big news will emerge, and we will see markets gap 5 times more than we've been used to. Where in the past bargain hunters would have entered a market 80 pips after a small black swan event, now they will wait for 400 pips, and where the market used to move 300 pips on a massive shock, now we can expect 10/15 big figure gaps!
The real danger trades for mine at the moment in the FX market are USD/JPY and AUD/USD which both could retrace extremely sharply at any time. Of course. as always, getting the timing right is the only thing that matters.
USD/JPY: Swing trading still the approach, but not so sure about bias anymore
I've been approaching USD/JPY with a swing trading mentality and a mild bearish bias, and whilst I'm still happy to trade the swings I'm not so sure about the bias anymore. There are a lot of (virtually every!) professional traders and analysts who are convinced that we are headed much higher and I guess I should stop being so stubborn and respect their opinion!
Regardless, any rallies towards 119.50 are excellent short-term selling opportunities in my view.
Cable breaks exotic barrier at 1.5000, AUD/USD next?
The flight into USD is showing no sign of abating. EUR/USD is making fresh lows, cable has busted through exotic options at 1.5000 and AUD/USD is sitting above its big psychological level at .8000. Looks like we will have an interesting day!
EUR/USD: Strong bearish bias, now need to pick new range
The ECB action sets a clear agenda for the EUR and further losses look inevitable. Nevertheless, the market is short and there will be short-covering spikes.
I'd now be using 1.1500/30 as my topside resistance area and selling rallies towards there looks like a sensible move. It's more difficult to pick any downside stopping points but many longer-term technicals have been calling for levels around 1.1200 so that might be the first area which attracts profit takers.
AUD/USD: Reserve buyers noted on dips today
Some nice snippets in the FXWW chatroom today regarding the AUD/USD. Reserve buyers have been notable on dips, and their amounts are usually significant. On the flip side, one of the big local banks reported that offers have been lowered from .8250 to .8150 by corporate and macro accounts.
Prefer to trade USD/JPY and AUD/USD pre- and post-ECB
The EUR will be whippy and silly at times I'm sure and even the GBP will get turbulent with EUR/GBP flows. I prefer to trade slightly 'independent' pairs like USD/JPY or AUD/USD during EUR-related risk events like today. We should get volatility but prices should return to some sort of normal value soon afterwards.
- USD/JPY is in sideways consolidation broadly between 115/120 and I think this could continue for quite a while yet as the market makes up its mind about the next big move. My bias is mildly bearish, simply based on levels of positioning, and I will happily sell any silly rallies.
- AUD/USD looks set to test .8000 and there will surely be stops aplenty below there. I will happily buy any exhaustive sell-offs as I still believe the AUD is harder than most in a market of soft currencies and additionally the market is already quite short.
EUR/USD: What the market is expecting from the ECB
Expectations are now pretty clear, with the market looking for EUR1.1 trillion in QE starting in March. This will mean that the massive EUR speculative shorts will have to sit tight for another few months and we all know how difficult that is to do. Once the rumours started flying overnight, EUR/USD spiked up to take out stops above 1.1650 and this could be a sign of things to come? Perhaps more of the macro shorts get squeezed post-ECB? We shall have to wait and see. I won't be taking any positions but will wait and look for some trade opportunities after the event.
AUD/USD: Market pricing in 50% chance of February rate cut
The CAD, AUD and NZD are always tightly correlated and the surprise overnight move by the BoC to cut its targeted overnight rate to 0.75% caught the market totally off guard and send the CAD tumbling.
Now the market will begin speculating on whether the RBA and the RBNZ will need to follow suit? The RBNZ were surprisingly hawkish last time around and it would certainly be a massive shift if they totally reversed this bias immediately. The RBA have been quite consistent and good at giving signals, so watch for comments from the board which might suggest that another cut is back on the table. The market is now pricing in a 50% chance of a 25 bps rate cut in February
In the meantime, the Anzac currencies still represent some sort of return for investors and therefore shouldn't come in for any massive sell-off. The rally in precious metals and the 'stabilising' of commodity prices should also give AUD buyers a bit of confidence.
There will be massive optionality at .8000 so we can expect a serious test of this level in coming sessions. Watch also for serious volatility in EUR/AUD.
USD/JPY: More short-term gains likely with market in swing-trading mode
I've had a reasonably good handle on USD/JPY over the last two weeks and I know I'm trading a market well when I'm willing to flip from long to short and back again. Many of the bank macro analysts are turning bullish again on USD/JPY but I don't sense this yet from the price action. The big risk is still to the downside in my opinion, with the market avoiding over-positioning post SNB.
For now the bulls are in control and support should be solid initially near 118.30. If this breaks then we can start considering a sell-small-rallies strategy. Initial highs at 118.85 provide the first line of resistance but a break above there could see an acceleration towards 119.50.
The latter is my preferred scenario for a good short entry level. I'm looking to start establishing a short position on any silly exhaustive spike or when a solid hourly top forms. In the meantime, trading the swings makes the most sense.
Heavy market positions still likely to be tested (EUR in particular!)
Everyone will still be a little nervous after the events of last week and I'd be very surprised if traders suddenly had the appetite for opening up fresh large positions. On the contrary, risk appetite will be weak and at the first sign of trouble we will see large macro positions heading for the sidelines.
The biggest speculative position in the market is undoubtedly short EUR. The really clever traders have been short EUR/USD since 1.35+ and are undoubtedly already booking profits. Whether or not this market has enough momentum to make fresh lows almost certainly depends on the ECB. Risk-reward suggests to me that we should be 'buying-the-fact' after the ECB, regardless of the outcome. We could get a really nasty spike back towards 1.20.
USD/JPY longs are the other big play in the market and I also like playing the contrarian card here. We could easily see another 120 test in coming sessions but I'll be looking for a good entry level in expectation of a 115.00 test sometime next week.
Apologies: NZ CPI tomorrow, not today
I guess it's better to be early rather than late :(
The New Zealand CPI data is due tomorrow morning, Wednesday January 21st.
NZ CPI on this morning's calendar
The Reuters smart estimate (see table) suggests a little bit of downside risk for the NZD this morning.
AUD/NZD is in a 200-pip holding range (as usual), this time between 1.0450/1.0650 and we will need to see a clean break outside of this to create momentum in either direction.
NZD/USD has also been stuck in a sideways range for the last 4 months, broadly between .7650/.7950, and we are likely to see a breakout there very soon as well.
Retail FX market coping admirably after massive shock
All in all I must say that I am very impressed with how the retail FX broking market has coped with the massive shock brought on by the SNB policy change. To the best of my knowledge no brokers have defaulted on client equity and the practice and regulation of client segregated funds would seem to have worked very well indeed. Thinking back a decade ago to what happened to client funds when Refco went broke, I must admit that the market has indeed made tremendous progress. The system has been designed so that extreme losses would be absorbed by the banks and brokers and that is what seems to have happened in this case.
Of course there are some worrying stories of individuals facing much larger personal losses than they had ever envisioned and these sensitive issues will have to be dealt with in a fair and professional manner. Judging by how well the industry has handled the initial shock, I'm hopeful that this issue will also be handled with integrity.
Of particular concern to us professional traders was the unprecedented lack of liquidity when EUR/CHF broke through the floor. I understand the desire of regulators to curb bank proprietary positioning as well as some market making activity but this is a double-edged sword and we felt the brunt of the 'blind side' last Thursday. When the proverbial hit the fan, there was a dearth of professional traders/dealers in place to help control the market. Let's hope that the new breed of professional retail broker, and the trading talent emerging through these platforms, will form the basis for this industry in the future.