AUD: Fundamentals slightly more bullish
- Iron ore prices have been falling in recent months but export volumes have been increasing with BHP Billiton announcing new record levels of production;
- Yesterday's CPI data will keep the doves at bay but rate hikes are also very unlikely so interest rate stability for the next 6 months is the most likely outcome;
- Price action for the AUD against the EUR and NZD has felt quite bullish over the last few sessions but I'm wary of trying to jump on trends after months of momentum-less markets.
My long term view for AUD/USD remain very bullish but I don't expect to break out of the .92/.96 range anytime soon.
Short-term prices should gravitate towards optionality at .9400 but be careful on the topside as there will be heavy option-related stops at regular intervals (we will hear more re exact levels as they get closer).
NZD/USD: Looking for dip-buying opportunity, keep close eye on price action
- My macro view remains the same that the commodity currencies will stay strong whilst the big 3 will remain weak as they continue with QE;
- Interest rates in NZ remain highest of the majors and will stay that way for some time;
- No overt signs of a weakening in Chinese demand for NZ assets;
- AUD/NZD should run into strong technical resistance above 1.10;
- On the flip side, the NZD is undoubtedly in danger of a long overdue retracement and milk prices are weakening.
Until we get some stronger evidence that the NZD bull trend is over, I'm happier buying NZD/USD dips. I have no fixed levels in mind just yet, let's wait and see how the price action is over the next few hours.
NZD falls heavily after RBNZ signals pause in tightening
I think many people can make a very solid argument that the RBNZ should not have tightened this time either, but after the strong tone from the last meeting they felt they were left with no choice.
Nevertheless, they have made up to some degree with the significant change in language and tone and there is little doubt now that they will stay on hold for quite a few months.
The NZD has fallen heavily but with interest rates still relatively high, and Chinese demand not slacking, this may be the dip that the NZD/USD bulls have been waiting for? Let's have a closer look when the dust settles.
EUR/GBP catching bid tone after BOE minutes
- EUR/USD ran into some significant bids near 1.3455 a little earlier;
- The BOE minutes have just been released and the immediate reaction from professional analysts seems to be that they are slightly more dovish than expected;
- EUR/GBP has been the market's favourite whipping child in recent months and is 'enjoying' a very modest 25 pip rally off earlier lows.
Compliance is King
The WSJ blog published these excerpts from a letter that the NY Fed sent to Deutsche Bank. Now we know what all the ex-cable traders are doing, they are trying to tick boxes 1-8 :)
USD/JPY: Definitely prefer the sell-rally play in short-term
- Yen crosses still look liable to deeper falls in my view, led by EUR/JPY but with others like NZD/JPY also looking fragile after massive up-moves. The big level to watch today in EUR/JPY is 136.20.
- Option-protection and semi-official bids near 101.00 have been very strong indeed but the stops below 100.70 are reportedly massive as well. I expect these levels to get tested again in coming days.
- The USD has been trying it's hardest to catch a bid tone but I'm still not convinced that the market is buying into this 100%.
Ranges will most likely remain slow and tight until one of the bigger levels breaks but I'm in the sell-30-pip-intraday-rallies camp.
Technical trades worth watching in AUD/JPY and USD/CHF
I'll add the rider that momentum-less markets don't trade well technically but some of these formations are of the longer-term variety and therefore more relevant.
- AUD/JPY has a potential double-top on the daily chart, and any retracements are likely to run into plenty of interested sellers.
- USD/CHF has an imperfect double-bottom formation in that the neckline was broken. There is chart resistance close by at .9040 and if this holds, we could see a pull-back towards .8850.
Usual rules still apply; sharp moves followed by sideways action
Unfortunately the early-European move in EUR/USD has followed recent market behaviour and started trading sideways after a sharp 50 pip move. Once market expectations become entrenched, it's pretty hard to shift them, and most traders are not looking for any more than 50 pip moves now.
Australian CPI will be the main event on today's diary. There are still plenty of strikes and expiries around .9400 in AUD/USD so 30/40 pip moves either side will attract plenty of interest.
EUR: Another 50 pip move then we stop?
Well I certainly hope not! But recent history and lack of momentum would suggest that the market will stop after 50 pips and take a badly needed 6 week rest :(
Big level to watch in EUR/JPY is at 136.20, but we still have a ways to go before we test that.
What sort of leverage is the hedge fund industry currently using
I'm just reading through some interesting industry research on the level of leverage used by 24 of the market's biggest macro funds.
The average level used sits somewhere around 2.0, with the vast majority using only 1.5 times but some outliers using up to 9.
If memory serves me correctly, this average is slightly higher than seen in previous years (but don't quote me on that).
Retail and Pro traders yet to take up slack from interbank market
Hearsay from the interbank market tells us that proprietary trading has now virtually disappeared from dealing rooms and in fact banks are also questioning their market-making activities in the face of regulations and investigations. This has made a big hole in overall turnover in the market.
I've spoken with 4 retail brokers and they are reporting declines (from the highs) in trading turnover of between 25/70% over the last 6 months. The retail trader continues to take his/her lead from the interbank market and although it's come a long way in the last 20 years, the retail FX trading market is still fighting to find it's own unique identity.
The professional trading market is readjusting to these structural changes and one of the world's largest hedge funds told me last week that their turnover is 60% lower than this time last year. Many have adjusted their goals and trading strategies to the changed environment and are day-trading or trying to push the now-smaller market around for a quick 50 pips. The Pro trader will quickly adapt to whatever is happening in the market. That said, most FX-specific hedge funds seem to be struggling this year with only a few reporting any type of small profit.
In short, we can expect the current conditions to continue for another few months. July and August are typical holiday months and have traditionally been quiet periods. If recent events in both the political and economic spheres cannot get the market moving, then it's going to have to be a very large black swan to shake things up again.
Professional market turning cautiously bullish JPY
I have read a number of quite bullish JPY predictions from major banks over the last few days. Geo-political considerations are the main driver as well as presumedly large long positions amongst Japanese investors in some of the JPY crosses, like GBP/JPY and NZD/JPY in particular.
I'm not yet convinced that the market is ready to turn bullish JPY after such a prolonged period of Yen bearishness. Certainly we could get some sideways consolidation, and even a mild JPY-bullish bias, but I can't see the market turning suddenly ueber-bullish on the Yen.
That said, there are still reports of very large stops below 100.70 in USD/JPY and I expect these to get triggered. When this happens we will likely see a test of 100.00 but I am prepared to try buying that dip (or preferably an AUD/JPY dip) if/when a short-term base looks like forming.
NZD: Likely to stay heavy on crosses as milk prices stay heavy
- Industry research still suggests large inventories of milk powder in particular in China;
- Geo-political tensions in Eastern Europe and the Middle East will keep risk-sentiment nervous;
- The NZD is at close to record highs on the TWI and market positioning is long (albeit not at extreme levels).
NZD/JPY looks technically interesting with a double-top on the daily charts around 89.60.
BOJ: Stress need to focus on geo-political risks
Quite presciently, the latest BOJ minutes stress the need to pay attention to geo-political risks.
USD/JPY: Market chewing through heavy bids on interbank platforms
- Large bids reported on the EBS almost every pip at current levels (101.15);
- Barrier protection expected ahead of 101.00;
- Japanese semi-official buyers rumoured to be on the bid also;
- Large stops rumoured below 100.70.
Friday, risk-off day, FX focus on Yen crosses
- The tragic events overnight will see more focus heaped on escalating regional conflicts;
- Friday's usually bring positional adjustments ahead of the weekend;
- Pairs like AUD/JPY are looking technically toppy in the shorter-term;
- Market still talking about very large stops sub-100.70 in USD/JPY (although semi-officials have been regularly buying dips in recent weeks).
I still like the short AUD/JPY play in the short-term.
Good luck and TGIF.
JPY crosses still looking soft
Regional stockmarkets are lower this afternoon and the JPY crosses are still looking most likely to get the FX market moving.
NZD/JPY is sitting on it's 50-dma at 88.05 and a break below here could accelerate momentum.
AUD/JPY: Stay short for now, reverse on bigger dips
- Very solid technical resistance now at 96.55;
- Short-term market sentiment seems to have swung in JPY favour;
- The RBA will continue to try and talk the AUD down;
- USD/JPY is in sideways trading pattern but reportedly very large stops below 100.70 could get targeted.
Most of the short-term indicators are bearish imho and with an obvious stop-loss level above 96.55, I prefer the short side for now. The longer-term trend is bullish in my view and any 300/400 pip sell-offs are undoubted buying opportunities.