I’m still in total disagreement with the majority of analysts out there who have been expecting a strong USD rally. Any structural liquidity issues, especially in emerging markets, which might be USD bullish will be more than outweighed by the fact that the collapse in global trade has led to a huge drop in demand for USD. Add in all sorts of uncertainties surrounding US Treasuries and I could not feel at all comfortable in holding USD for any length of time.

So what to trade?

USD/JPY: For now, be short and stay short for a test of 100.

AUD/USD: Any dips driven by AUD/JPY selling will be short-lived imho and I’m in dip-buying mode. The levels I’m watching are .6325/50 to begin with then .6260-80. Once the USD really turns, I’m expecting a 15% move higher in the AUD/USD.

Cable: Similar to AUD/USD, any dips will be driven by GBP/JPY selling and I feel that levels around 1.2250 will provide good value entry levels. That said, with cable we always need to be particularly vigilant as 300 pip over-shoots are almost the order of the day! I’m not leaving any orders, preferring to trade it on a day-by-day basis.

EUR/USD: The EUR looks pretty ordinary on most of the major crosses so I’m leaving it alone for now. Speculative positioning in some of the EUR pairs is getting towards ‘painful’ levels so no doubt we will get a very nasty stop-loss driven rally one of these days.

CONCLUSION: The market is starting to get comfortable with the trends which started earlier this month. Short-term positioning is getting over-stretched suggesting that we may see a short-term rebound in the USD. Trade-of-the-moment: Buy dips in AUD/CHF towards .7425.

1. Open a fresh workspace on FXWW Connect and select the ‘desktop’ option;

2. Right-click on the screen and select ‘Reuters Full Quote’;

3. Use the following RIC, ‘DE10YT=RR‘;

4. Right-click once again on the empty part of the screen and select ‘Chart’;

5. Insert the same RIC in the instrument panel;

6. Move and re-size either panel by left-clicking on the top bar and moving, or left-clicking on the bottom right-hand corner and re-sizing;

7. For more details on which RIC codes to use for other markets like US Treasuries, UK Gilts, Australian Bonds etc, please consult the PDF file  for FXWW Connect Help.

Overnight reports suggest that there is decent sized sell interest near 1.1500 and with a recent spike high at 1.1530 just above there, we know where to put our stop!

On the other hand, if you’re bullish EUR/USD, there will be plenty of trailing stops now above 1.1530 and a break above there should see a momentum spike.

The next approximate resistance levels of note in these crosses are .7600 in EUR/GBP, 1.4700 in EUR/AUD and 1.4400 in EUR/CAD.

Ok, that’s out of the way. SNB chief Jordan said the following in a weekend interview with the Neue Zuercher Zeitung:

We are still monitoring the FX markets, and will intervene if necessary

When and where they will intervene is another matter. I cannot imagine that they would be so stupid again as to try and lift the market by force, but they will almost certainly step in, especially in USD/CHF, if prices start falling too far and too fast.

(Original article auf Deutsch)

This all occurred on the main interbank trading platform for EUR/CHF at around 8:30 pm Sydney time yesterday so please take that into account time-wise. There are other platforms also and I do not currently have complete information on what happened there (Edited):

• Prices first traded below 120.00 at 1.1972 at 08:30:48. We cannot be sure of the amounts changing hands;
• Prices traded at Parity, 1.0000, at 08:31:46, so less than 1 minute after the first trade below 1.20.
• Modest liquidity only entered the market after 08:35 when prices were still trading around 1.00.

Information at this point in time is still very sketchy and hard to find.

What does this mean for EUR/USD? The break below 1.1750 failed to generate fresh momentum so we might see some short-term short-covering kick in, especially if cable takes on a bid tone for a few sessions. But, I’d be looking to sell into that rally in EUR/USD, perhaps around 1.1875ish?

The main move in the market is a EUR sell-off and I expect the EUR crosses to remain very heavy in the short-term, especially EUR/GBP and EUR/AUD imho. Therefore I quite like the look of buying any more exhaustive dips in cable and AUD/USD looking for a quick 150/200 pip pay-out.

Liquidity is poor so I’m looking for levels where there may be stops and putting my bids in 50/70 pips below there.

Selling rallies in the EUR crosses is still the way to go, especially in the next 2 weeks as we approach the ECB meeting and the Greek election. I’d also definitely avoid EUR/CHF, way too risky.

• Prime Brokers are reporting heavy speculative short positions amongst professional players, especially through the options market;
• Overall short positioning in the spot market is at significant levels;
• Net Fixed Income flows have been very EUR-negative and that’s likely to remain the case;
• Reserve manager currency allocations seem to be signalling a shift away from the EUR.

The latter two can lead to very heavy flows so selling rallies is still the obvious play in my view.

The crosses will be less volatile than EUR/USD, with EUR/CAD and EUR/NZD offering some decent longer-term trade set-ups.

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)

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.

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.

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?

The speculative market is short and bearish on the EUR and they are hoping for another dovish ECB statement. The benchmark rate will stay at 0.05% and the deposit rate at -0.2%, but it’s the policy statement which the market will be eyeing with keen interest.

A dovish statement might convince some of the big reserve managers to dump on the EUR whereas a more neutral commentary will likely lead to short covering, especially on the crosses.

I also tend to trade with a bias against existing market positions during these periods of volatility. People being people, they will get scared when volatility rises.

Presently, according to my information, EUR/USD is the single biggest position in the market (short of course) so buying dips in EUR crosses makes sense purely on a short-term volatility basis. I will look at some of the individual crosses  in more depth as the day progresses.