EUR/CHF: Update on Christmas Day price action
From the FXWW Chatroom:
For those just returning after Christmas - there has been a bit of a stewards enquiry as to what exactly happened to EURCHF on Xmas day... there are several suggestions that we traded sub 1.2000 thru the SNB cap - not having seen the price action myself I can't provide a definitive answer, however SNB has said:
"The minimum exchange rate was not breached at any time. "
"The exchange rates cited in media are non-binding price indications which banks can offer their clients. The data in no way illustrates that transactions were conducted above 1.20 in the interbank market"
(ie below 1.2000 in EURCHF)
Corporate and institutional flows will dry up from today
Many institutional and corporate players will be taking a full two week break from the FX market and with politicians also less likely to make any earth-shattering decisions during this period, any moves will be mainly speculative and driven by lack of liquidity.
Overall positioning is at slightly below moderate levels, according to snippets of information I can glean from Prime Broker reports, so we should not see any massive stop-loss driven spikes. Liquidity is generally being referred to as 'appalling' and that situation won't change this side of January 5th.
One potential spanner in the works is EUR/CHF, with the SNB support line likely to come under massive pressure now that the negative rates move had such little impact.
EUR/CHF: Look to book interim profits near 1.2125
Big move higher in EUR/CHF after the SNB announced the move to negative rates. Normally one would expect that this is worth 200+ pips in EUR/CHF but it's Christmas and logic goes out the window. There are 100's of billions worth of overseas accounts in Switzerland and the question of course is whether this money will be influenced to leave with the introduction of negative rates?
I'd suggest No.
The reason that money gravitates towards "Die Schweiz" is usually that it wants to remain anonymous, not that it's chasing yield. So negative rates won't have a major impact in my view.
There are plenty of speculative longs built near 1.2015; I'd be looking for a handy pre-Christmas 100-pip present and then re-load on dips.
Liquidity continues to be very poor and will only get worse
Since the beginning of last week, e-commerce dealers have been complaining about the lack of liquidity and the fact that it's only going to get worse. Tonight's FOMC statement will only serve to heighten the fear factor which will further detract from the liquidity pool. Wherever the stop-losses are, that's where the market will gravitate towards. Getting 'married' to logical fundamental positions can be very costly at this time of year. I'd suggest using the big 200 pip swings to massage positions, whilst of course keeping overall exposure at around 1/2 normal levels (given the ferocity of some of the moves we've been seeing).
Regulator focus on Algos will lead to greatly reduced liquidity
Interbank e-commerce dealers have been reporting heavily reduced liquidity over the last 7-10 days and it's not just the looming Christmas holidays which is responsible for this. The recent scrutiny into algorithms on trading platforms at big interbank players such as BarCap and Deutsche is not a one-off and dealers across the globe are bracing themselves for a regulatory onslaught.
These investigations are only going to make trading-platform and dark-pool providers more cautious and gun-shy. Many of the practices which they have implemented, which are the sole reason for many of them to be in business, are now being called seriously into question.
One definite effect of this will be heavily reduced liquidity in the spot FX market so best we bit-players get ready to adjust our positioning accordingly.
AUD/NZD: Pretty clear 'sell-rally' play
If the FX market is one big interest rate play, as many would contend, then we should be in the 'sell-rally' camp when it comes to AUD/NZD.
The RBNZ, very surprisingly in my view, added a hawkish tone to their monetary policy statement whilst the RBA have a definite dovish tone. A widening of the interest rate spread will be very bearish for AUD/NZD. The commodity stories for both currencies seem to balance each other out; with falls in iron ore affecting the Australian economy and falls in the milk price affecting NZ.
With a technical top now around 1.0925, selling rallies with stops clearly above there would seem to be the sensible medium-term trade.
Enter the FX market's 'Period of Pain'
It's two weeks before Christmas, liquidity is drying up very sharply indeed according to interbank e-commerce dealers, and all positions are now fair game for the stop-loss munching machines.
USD/JPY was the first to experience the pain with an overly positioned market falling almost 400 pips in a few short sessions. Short EUR positions could well be the next big targets? I've exited my short EUR/GBP trade and will sit happily on the sidelines after a rough 6 months :(
This is not the time of year for having stubborn fundamental views, this is the time of year to play good defence.
USD/JPY: Pick a wide range, looks like it will be whippy
E-commerce dealers at the major banks were reporting sharply reduced liquidity yesterday and this will mean more volatility in a heavily-positioned USD/JPY market. The trend is obviously very strong but pull-backs will be sharp and painful. Put your traders cap on as we could easily see 300/350 pip ranges over coming sessions, perhaps 119.00/122.50, or something like that?
EUR/USD: We can expect quite a few sessions of consolidation
The market got caught short in illiquid conditions and that will give the bears some food for thought in coming sessions. A daily close back above the previous 1.2350 support level would also weaken the bears argument. The bearish trend is strong but nothing moves in a straight line in the FX market.
If I were short, I'd certainly now be looking to buy dips back towards 1.2300. On the other hand if I were long, or looking to enter a short position, I'd be looking for rallies to 1.2550 to sell into.
That sounds to me like a good recipe for consolidative range trading over coming sessions and days
EUR/GBP in consolidation mode
I'm still short of this pair and happy to stay that way. Obviously, based on the reaction to the ECB overnight, the short-term market was overly short EUR at the wrong levels and got caught out by some illiquid conditions. Nevertheless the fundamental view for the EUR heading into 2015 is bearish and my view that cable will base somewhere around 1.55 remains unchanged.
A quick look at the EUR/GBP daily chart shows broad consolidation between .7825/.8025 and I'm still strongly of the view that this will resolve itself in an aggressive bearish break to sub-.75 levels early next year.
Are demo accounts relevant in establishing a track record?
In a word, No! The whole art of being a trader lies in ones ability to manage risk, maximise profits and minimise losses. A trader's performance on a demo account will not give any insight into how they operate under pressure.
If you are an absolute beginner and learning all the intricacies of the FX market, then sure, use a demo account for years on end.
If you think you could be a professional trader and you hope to establish trust with investors and prove your skill under extreme pressure, then a demo account is completely useless in my opinion. I also do not believe that a demo account is a good way to highlight trading systems. We all know that trading conditions (slippage etc.) vary significantly under real market conditions as opposed to demo accounts, where the market is always perfect!
When someone offers me a magical and magnificent trading system which has been cleaning up on a demo account, my obvious question is why hasn't the trader opened a live account with this money-printing machine! If you're not willing to back yourself, how can you expect me to back you!
EUR/GBP: Cover partial shorts on sharp dips below .7800
The break below 1.2350 in EUR/USD did indeed increase bearish momentum in EUR/GBP, and with cable support levels still holding firm, being short the cross is a compelling trade.
Nevertheless, it's unlikely that this pair will collapse in a straight line, it seldom trades this way, so covering on dips and re-selling on rallies makes very good sense. I'm looking to buy back 50/60% of my position on any sharp dip below .7800.
EUR/GBP: Will add to short position if EUR/USD breaks below 1.2350
The EUR still looks pretty sick to me but I'm also of the opinion that cable is close to 'must-buy' levels. Whether this is 1.5500 of 1.5350, I simply don't know, but what I am sure of is that we are close to a base in cable.
The obvious way to trade this view is through a short EUR/GBP position. I've worn a few volatile swings already and will continue to build, getting more aggressive if EUR/USD breaks lower onto a new plane. Target levels are around .72/.73 early next year.
CAD/JPY: Cutting my position at breakeven
Despite all the extreme volatility in the oil price, CAD/JPY was unable to break lower. Timing is everything in the FX market and mine is off at present. I'm exiting this trade at my entry level and will concentrate my energies elsewhere.
RBA: No change in policy or language expected
There is a small chance that the RBA will refer to the possibility of further rate cuts but most professional analysts that I've read seem to consider this very unlikely. Continued stability on policy and language is the expected outcome.
If this is the case, and with a large option expiry at .8500 later today, I'd expect the AUD/USD to trade in a fairly tight range either side of this.
AUD/NZD: Downside pressure set to intensify
- Unconfirmed reports this morning that the Australian government is lowering it's presumed iron ore price to $60/tonne;
- Little that the RBNZ can do about the overvalued NZD.
The AUD has been under pressure in early interbank trade and with commodity prices in general unlikely to make any sudden recovery, this trend in the Aussie won't change too soon. AUD/NZD has put in a strong technical top and selling rallies back towards 1.0920 certainly makes sense on plenty of levels.