AUD/USD: Option players still dominating ranges
I'm sticking with my strong buy-dip bias in the AUD/USD and I expect the AUD to continue to make strong gains on the crosses. But we may well be in for a few months of broad sideways trading between .92/.95 and this seems to be the way that the options market is calling it. The bids near 92 cents were extremely large and local dealers say that any topside stretches are likely to run into similarly large offers, with the options market tying in a range.
The last top-side foray stalled at .9425 and there will be stops above this level, but the sellers will be waiting patiently just above there.
Cable: Looking susceptible to a downside clean-out?
A lot of traders have been jumping onto the GBP bull train at pretty lofty levels and it's starting to look a bit toppy. Don't get me wrong, I'm definitely still in the buy-big-dip camp but I'm starting to think that we might get one. If this pair breaks below 1.6690 then I would not be at all surprised to see some hefty stops going off.
Risk-reward in the short-term would seem to be favouring the bears. Selling now towards 1.6780 with a stop above 1.6830 looking for a test of 1.6690 certainly makes commercial sense.
A sharp break below 1.6690 could be good for 200 pips if the medium-term macros who got in at the wrong levels start panicking.
FX-only managers struggling to compete with other classes
Another major side effect of the lack of volatility in the FX market is that it drives investor capital out of the asset class in search of better returns elsewhere. This of course has the unfortunate effect of reducing volumes and volatility even more.
Equity markets have been roaring ahead across the globe and there have been plenty of opportunities for investment managers to make a profit.
It's been much more difficult in the FX space; traders can sit on their hands and wait for their opportunities but managers have mandates to fulfil and must try to make their monthly returns even in the face of very limited opportunities.
AUD and NZD make decent gains on the crosses
Hate to keep harping on about it but this very slow-burner of a trend is likely to continue. The Big 3 (USD, EUR and JPY) will continue to lose value as long as their only policy option is to keep printing and the second-tier currencies become a much more viable store-of-value for real money players. The AUD, NZD, CAD and NOK will continue to attract inflows over the medium term and I still believe it's a matter of being patient in the short-term and waiting for some attractive entry levels.
It's likely to be quiet again in Asia with only minor NZ, Australian and Chinese data on the calendar.
Oil price rises: Look for GBP/JPY buying opportunities
The oil price jumped last night on the back of reports that Libyan exports are now close to zero. Coming on the back of decent Chinese economic data, shorts were forced to cover and we ended the day with an almost 2% price rise.
The traditional oil-proxy trade in the FX market is the Yen, as the Japanese economy is so overwhelmingly reliant on oil imports. GBP, NOK and CAD are currencies which tend to be positively influenced by oil price rises whereas the Yen is generally adversely affected by such a rise.
I'm not an expert on the oil market and we may simply be seeing a one-off stop-driven event, but if we do start seeing a trend in the crude market, then looking for dip-buying opportunities in some of these Yen crosses does make good sense.
EUR/USD: Not the time to be getting overly bearish
All of the signals are pointing toward a lower EUR/USD but the most important one, market momentum, suggests that it will have trouble breaking lower onto a new plane.
Just before the ECB decision last week, EUR/USD was trading around 1.3600. We are still there! The news has certainly been bearish EUR which tells us that this market was already short and that it doesn't have the appetite to start breaking new ground. I would be very wary of entering fresh shorts at these levels; if you're bearish, either wait for confirmation via some fresh new lows or else be patient and wait to sell into short-covering rallies.
I remain bearish on the EUR crosses but with EUR/USD struggling to break lower, I'm looking for buy-dip opportunities in cable and AUD/USD, and/or rally-selling opportunities in USD/CAD.
Structural change in FX market leading to low volatility
It's not unusual during a period of structural change to see the market lose momentum and focus.
The big inter-bank players are being forced out of prop trading through a combination of regulation and Basel III, and market making is also becoming an increasingly difficult proposition for many of them.
The retail market had been taking up some of the slack over the last few years but this market is also in a consolidation phase, becoming more mature with many marginal participants (both brokers and traders) being forced out due to their lack of competitiveness.
Which brings us back to the professional traders, the true backbone of the market, providing pricing and liquidity. In years gone by all professional traders were trained in the inter-bank space but those days are gone. Now the new breed of professional trader will almost certainly start their trading life in the retail space. This is another structural change which the FX marketplace will take some time to adapt to.
So all those aspiring professional traders out there should stay patient and keep the faith. As long as there are currencies, there will be a currency market needing pricing and liquidity. Once the 'new' market order rises after this current phase of structural change, the demand for good traders will increase sharply.
Staying bearish EUR, USD and JPY
My macro view of the market remains the same, the big 3 (currencies and printers!) will stay weak for the foreseeable future or until some important fundamental shift takes place. This will make trading in EUR/USD, EUR/JPY and USD/JPY a matter of range trading and timing. In the short term, I'd expect the EUR to be the weakest of the 3 given the recent policy shift but it will be very important to get in at the right levels.
Of the rest, I still like the GBP, CAD and AUD. The CAD is most over-sold in my view and still susceptible to a sharp short-covering rally whilst the strongest trend in the market is undoubtedly the bullish GBP trend and I see no reason to abandon the buy-dip strategy here.
In other words, selling medium-term EUR/GBP rallies is still the most obvious strategy.
(I haven't mentioned the CHF as I have an overwhelming but illogical urge to be limit short!)
All quiet on the FX market front
Apart from some fat-finger mis-hits on USD/CAD, it's been another very quiet start to the FX trading week. As someone in the FXWW chatroom just noted, there's about as much chance of a vol breakout as there is of England winning the world cup!
Oh dear.
Our patience will continue to be tested but we must continue to wait for our levels and not be forced in rash market-chasing trades.
It's a public holiday here in Australia today which won't help matters.
EUR/GBP: Even more reasons to be short now
The ECB decisions from yesterday make this trade an even more attractive proposition and I see no reason not to be selling any small rallies in expectation of a serious test of .8000, perhaps even as early as next week. Central bank event-risk is now out of the way for another 4 weeks and once the dust settles (probably today) the market will surely have another go at the downside in this cross which is still at reasonably lofty historical levels.
Initial resistance should remain solid at the .8160 break-down level.
EUR/JPY: Likely to be main focus during Tokyo trade
After the ECB moves I am sure that Japanese investors will be active in EUR/JPY and I'm thinking that they will be likely more bearish than bullish.
Previous lows near 139.90/00 are capping for now and a clean break above there targets the 50-dma near 140.60. Risk-reward favours selling rallies imho.
AUD/USD: One range breaks, another takes over
The crosses were very busy again overnight and despite the fact that it was ECB and BOE events, pairs like AUD/USD moved quite significantly. Stops above .9335 were eventually targeted and triggered, that's just the type of market that we are in.
The topside target for the bulls will now be .9425 whilst support levels are not really all that strong until back at .9200, so a few weeks of sideways trading inside this range would certainly not be any surprise. It will take some major USD or AUD event to drive us out of that range.
There is no major economic data today in Asia, so I would suggest fading 40 pip moves either side of the current .9335 level.
EUR/USD: Massive short-covering after the event
Once a market starts trading sideways it finds it very difficult to suddenly generate impulsive trend-building momentum. There were some very large shorts built up in the EUR since the last ECB meeting and the clever ones got the chance last night to book some healthy profits, and they took their chance. Don't look a gift horse in the mouth!
The path of least resistance for EUR/USD now would seem to be down, after major new lows overnight, but with trailing stops likely above 1.3685 and again above 1.3750, picking the correct entry level will be very important.
Positions: Short USD/CAD, long USD/CHF
Basically I've got a CAD/CHF long position which is unlikely to move too far too fast! That suits me fine as I tend to struggle in these choppy sideways markets.
USD/CAD should continue to trade sideways in a 1.08/1.10 range before (hopefully for me) breaking lower.
USD/CHF looks to be trying to form a base on the daily chart and I'm in watching mode on this pair whilst building a long position.
This might be a slow one :)
AUD/USD: Obvious range edges at .9200/.9325
Today's focus will be primarily on the EUR and the GBP, with central bank decisions in both. Tomorrow's NFP is of course never far from traders minds.
Australian trade data and the HSBC version of Chinese services PMI will be the main events on this morning's economic calendar.
The close above 1.1000 in AUD/NZD is yet another bullish AUD factor but it's unlikely that the AUD/USD will break out of its range until after the NFP data tomorrow night.
USD/JPY: In recent months has tended to top-out post NFP
I read a research piece from BofAML yesterday which showed how USD/JPY has rallied in the days before recent NFP releases, has then had a spike higher on the good numbers, but quickly fell as longs scurried to book some profits.
That is exactly how this current USD/JPY market also 'smells'.
EUR: Best left alone until after the ECB
The market has written in a reduced Refi rate, a negative Discount rate, and some extra LTRO-like measures into tonight's ECB rate decision. My sources in Germany tell me that this is far from a foregone conclusion. Regional banks and insurers in Germany are complaining loudly, and Germany is always the loudest voice inside the ECB.
The lowered Refi rate is surely a given but it's no certainty that the other two measures will be adopted at this time.
I think it's best to leave the EUR alone until after the ECB decision. My sense is that sentiment is bearish and short-term positioning is 'short', so any disappointment in terms of measures will lead to a sharp stop-driven rally. On the other hand, the longer-term macro players will start selling heavily if the ECB turn more dovish than expected, leading to a sharp move lower.
Too much guess work in my view, sit back and wait for trading opportunities after the event.
USD/JPY: Hedge funds main driver behind recent rally
It's getting increasingly hard for professional traders to generate any returns in these markets and it's no surprise to see hedge funds clambering once more onto their favoured USD/JPY long trade in the hope of a developing trend.
The clever ones bought in around 101.00 when the stops were being triggered and the Japanese semi-official bids turned up. The others are chasing it higher but are running into heavy offers from Japanese corporates and option players trading the range.
I still think we are in a strong sideways formation in USD/JPY and it will take an important event to jolt it out of its sleep cycle.