AUD/JPY trading higher in early trade post G-20
USD/JPY is trading above 116.50 in early interbank trade and the AUD/USD is holding steady near .8760 in thin early interbank conditions. The free trade agreement between China and Australia is seen as significantly 'risk positive' so it's little wonder to see the AUD/JPY trading higher.
The next major topside technical milestone for the cross is around 105 and the next topside target for USD/JPY is significant optionality around 117.50.
Definitive definitions: Prop traders, dealers, strategists, etc
I know most retail traders like to think of themselves as being traders, market makers, economists and technical analysts all rolled into one. This is not the case in the institutional world where each roll is very carefully defined:
- Spot dealer or market maker: You wear white socks with cheap shoes and an expensive suit. You can remember every single trade for the last 30 years but you only recount the good ones. The longest you've ever held a position was that time you popped out for a smoko. When you hear the following terms, (you immediately think of): Prop trader (half-day), Analyst (yesterday's weather), Strategist (I'll take his stops on my books), Economist (sorry, what's that).
- Prop dealer: You are of course a master of the universe and you dress accordingly, soft shoes no socks of course. Losses as well as profits are worn as a badge of honour and it was their fault for hiring you during a draw-down phase! When you hear the following terms, (you immediately think of): Spot dealer (sell 20 for me, take a pip for yourself), Analyst (Shrink, yes I've got one), Strategist (Puhleeese), Economist (sad sod on only $400k).
- Analyst: Well, let's face it, you've failed at all the others so you are now an analyst or worse still, an independent analyst (unemployed). When you hear the following terms, (you immediately think of): Prop trader (I used to be better than him), Spot dealer (I used to be better than him), Strategist (I am better than him), Economist (I am better than him).
- Strategist: You get 4 out of 5 trade directions right yet you still lose money. The spot dealer wants to enter the market when you are stopping out. Your own wife asks you who you are twice a week. When you hear the following terms, (you immediately think of): Prop trader (I hate him), Spot dealer (I hate him), Analyst (Shrink, yes I've got two), Economist (I hate him).
- Economist: You are 55 but look 42. You dress impeccably, elegant and sophisticated. You are the lucky sod on $400k. When you hear the following terms, (you immediately think of): Prop trader (Something to do with the theatre?), Spot dealer (Dog salesman), Strategist (Hairdresser), Analyst (Interior designer).
Cable: Looking to start building long position again
My long-term macro view remains unchanged, namely that we should be buying GBP and the commodity currencies and selling the Yen, EUR and the USD. The market has gone from bearish USD, to primarily bearish EUR and JPY, but I see this as being different to being wholly USD bullish.
The turn in USD/JPY has of course forced a short-term turn in cable, AUD/USD, USD/CAD etc, and quite substantial ones at that. But I'm of the view that these moves are wrong, and will be eventually sharply reversed.
But could USD/JPY explode higher towards 125? Absolutely it could, and if this happens then I'm sure the USD will make more short-term gains against the commodity currencies. So it's certainly possible that cable sees 1.53 and AUD/USD sees .83. But at some stage I had intended to re-enter the long cable trade and we are at, what I consider to be, comfortable levels. I'm dipping my toes in the water with a small cable long position; let's see what happens.
The changing face of the FX marketplace
New official rules will come into place on January 1st which will basically spell the end of all prop trading at the major banks, which in most cases had already stopped anyway. Banks will also be faced with the dilemma of defining where market-making stops and where holding prop risk begins.
Bank trading rooms will become more increasingly automated with flows being immediately cleared for a small margin or commission. Risk takers will become obsolete with only managers and sales dealers finding any longevity in previously massive trading rooms.
Hedge funds will still exist, providing liquidity and proprietary risk opportunities for professional investors. The main change to this end of the industry is in the profile of a typical hedge fund employee, with most of them well into the second half of their trading careers and few if any developing traders coming from the disappearing interbank talent pool.
The FX market will naturally come to depend more and more on the retail market to provide liquidity and risk outlets. Thankfully the retail market is becoming more sophisticated, developing its own pool of trading talent which will become the next generation of market makers and prop traders. Retail brokers are creating their own liquidity hubs with each other and are building their businesses now on profitable traders, rather than on the losing traders which was often the case in the past. Products and services now available to the sophisticated retail trader are very close to those which the institutional trader has always enjoyed and whilst there is still a way to go, the retail market is well on the way to becoming the number 1 dominant sector in the FX marketplace. Changed times indeed!
USD/JPY: Feels like typical bullish consolidation- next target 117.50
Every pullback seems to run into a myriad of bids and this type of sideways trading after a big up-move certainly smells of typical bullish consolidation. The next big optionality level is at 117.50 and that would seem to be the obvious topside target. Personally though I'm leaving it alone as my timing on this pair has been atrocious.
EUR/USD: Prefer to buy intraday dips for possible short-squeeze
Notwithstanding the fact that the SNB is upsetting the market equilibrium with their ill-advised tactics, I still like the risk-reward associated with buying dips in EUR/USD in anticipation of a pre-weekend short squeeze. EUR/GBP led the way overnight and I suspect that there will now be plenty of stops above 1.2500 in EUR/USD.
The short-term charts would suggest that my stop-loss should be below 1.2390, so buying any dips to 1.2430/40 with a tightish stop makes good trading sense to me.
EUR/CHF update: Decent orders either side of very tight range
An analysis of the big interbank trading platforms from Morgan Stanley is showing very solid offers at 1.2026/27 and decent sized bids at 1.2015/16 (courtesy of the FXWW chatroom on Reuters Messenger).
It looks like we will be in for a long slow battle in the EUR/CHF, especially given reports that the SNB has been selling EUR against other major currencies, immediately balancing their reserves as best they can. This type of intervention always has plenty of ripple effects.
EUR/CHF: Bids getting lighter towards 1.2000
Overnight reports from the interbank market suggest that the bids on the interbank platforms below 1.2020 were lighter than expected. Not sure if this means anything, it is after all 1.2000 which is being defended, but it is interesting to note that overall turnover is relatively normal.
I'm sticking to my view that the risk associated with trading this pair just isn't worth it so its best left alone. Heavy central bank intervention will cause disruptions across all currency pairs and this is another factor to watch out for.
Cable: Getting close to interesting levels
As a definite non-believer in the current USD rally, I've been biding my time and waiting for for a good entry level back into cable longs. There is strong technical support at 1.5720 and that is the level I'm watching. GBP/JPY also has decent short-term support near 181.00, which will also provide clues as to the pound's near-term fortunes.
These levels seldom hold exactly to the last pip, so I will wait for short-term basing formations or spike lows before entering with very careful positions. USD sentiment is very strong so it's highly unlikely that we get a sudden sharp reversal there; in other words even if I miss the first opportunity, there are likely to be others.
USD/JPY: Plenty of volatility, direction still bullish
The day-traders can't complain about the opportunities in USD/JPY with multiple opportunities to trade either side of a 100 pip range. The market is awaiting official news of a general election in Japan and this uncertainty will only add to the volatility.
There will be opportunities for both sides but those who've been buying dips are clearly coming out on top. The next big optionality level on the topside is at 117.50 I'm told, so that will be an obvious target. Support levels are firming now just below 115.00.
EUR/CHF: Most bank analysts expect SNB support to hold
If you spend any time in the FXWW chatroom you will get plenty of opportunity to read bank research pieces on the CHF ceiling and whether it will hold or not. I'm basing my opinions primarily on price action and market risk but I think its safe to say that I'm pretty much on my own on this one. All of the research pieces that I've read so far are on the side of the SNB and their supposedly 'limitless' arsenal.
They may be right, but the risk-reward in buying EUR/CHF at current levels just isn't there imho. If you are bullish, wait until the bears are exhausted and the Gold referendum is over, then you can buy with more security.
EUR looking oversold on the crosses
- EUR/GBP- the whole world seems to be bearish, myself included, and we are nearing very significant and proven support at .7750;
- EUR/CAD- also getting very close to significant support levels near 1.4000;
- EUR/AUD- slightly more mid-range in a 1.42/1.46 consolidation but you can argue the case that a bottoming formation is developing on the daily chart;
- EUR/JPY- made fresh highs on the daily chart at the end of last week.
With no policy developments to come from the ECB for quite a while, and with the market very bearish and very short, could we get a nasty short squeeze in the EUR crosses?
FXWW update: Funding programs, information portals, and signals
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EUR/CHF: I expect the SNB support at 1.2000 to break
There is simply no way that the SNB can justify buying massive amounts of EUR whilst the ECB is heading into a cycle of QE. With the Gold referendum in Switzerland putting even more focus on central bank activity, pretending that you can hold the financial markets at bay is a fools errand.
The support level at 1.2000 may hold the first attempt and possibly even the second, but in my view its only a matter of time before the floodgates open.
USD drifting lower in listless Asian trade
- Chinese CPI came in on expectations at 1.6%;
- USD/CNY was fixed sharply lower, probably as a result of the APEC conference currently being held in China;
- Nothing in the way of major stop-loss levels being reported close to the market.
NZD/USD: Price action around .7670 suggests interim base in place
I saw some pretty impressive technical calls on Friday suggesting that an interim base was forming in the Kiwi and it looks like these guys have called it perfectly. Weekend data out of China has given the commodity currencies another boost and after a 1200 pip fall, we may be about to see a decent retracement.
The AUD/NZD has been consolidating in a 1.09/1.13 range and a return to the medium-term down-trend is certainly a distinct possibility.
Risk-reward would suggest that buying NZD/USD dips with stops well below .7650 makes excellent sense.
Cable: Long term bullish and happy to buy dips to 1.5720
My best trade of the year by a long way was my long cable trade and I'm willing to start dipping my toes back in this water on any dips back towards strong technical support around 1.5720. EUR/GBP is consolidating near its recent lows and still looking heavy whilst GBP/JPY has caught an updraught in recent weeks; any rally in the cable will need a buoyant GBP on the crosses.
It seems everyone is now bullish USD, which is usually the best time to start buying cable!
AUD/USD: Range trading with bearish bias
- Shortish-term resistance now firming at .8650 breakdown level with support near the base of a bearish channel at .8400; playing the edges of this range with a bearish bias makes good sense.
- Longer term support levels at .8050 are the main downside target with resistance now likely to be super firm at .8850ish.
AUD/NZD looks to be in a 1.09/1.13 consolidation range whilst AUD/JPY is bullish with a strong buy-dips bias.