Forex Blog

March 19, 2012

Risk Correlated Assets Could See Major Reversal Over Coming Days

Filed under: Forex News — Tags: , , , , , , , , , , , — admin @ 7:34 am

By Joel Kruger, Technical Strategist for DailyFX.com

  • Euro well supported ahead of key level, takes pressure off downside
  • Equities still looking overdone to us; there are risks for pullback
  • Pimco on wires with risk negative comments relating to Eurozone
  • Australian Dollar at risk and showing notable divergence from equities
  • Yen and Franc also worth watching over the coming days

The Euro has managed to find some decent support for now by 1.3000 and ahead of key levels at 1.2975, with the market once again bid up on the back of some risk positive themes. Global equities remain in demand and the healthy risk appetite has opened the door for renewed interest in risk correlated FX markets. However, we continue to remain highly skeptical with the performance in equity markets and are on the lookout for a sizable pullback. It is the view of this desk that the retracement in equity markets from the 2007 highs to 2009 lows is now well overdone and not reflective of fundamentals. US equity markets have retraced some 85% of this move, and given the global economy is still attempting to recover from a major recession, we feel that an 85% retracement is perhaps a little too optimistic at this point.

Pimco’s Mohamed El-Arian has been quoted in the UK Telegraph as saying that he expects a “second Greece” in Portugal, and that the country will soon need a second bailout with the original Eur78B package falling short. Although the story has not been getting market moving attention to this point, we share Mr. El-Arian’s sentiment and believe that the ongoing troubles in the Eurozone and additional threat of a major slowdown in China should act as a catalyst for a near-term liquidation of risk correlated assets.

Of the major currencies, we see the higher yielding Australian Dollar as the most at risk in the current market environment given the currency’s risk correlation and exposure to China. Data out of Australia has also been showing signs of weakness and any materialization of broader risk off themes could ultimately start to weigh heavily on the currency. We have also noticed a breakdown in the correlation between the Australian Dollar and US equities in recent days which could foreshadow a more prominent structural shift to risk off trade ahead. Currency markets have a way of leading and if the Australian Dollar has not been confirming recent equity strength, this could be offering a warning sign of a bearish reversal in US and global equities.

Moving on, the Yen is also worth watching this week with the currency the most stretched of the major currencies and potentially at risk for a reversal. The Yen has been very well offered over the past few weeks and the acceleration of declines has resulted in some highly technically oversold readings. Fundamentally, any shift here and appreciation in the Yen going forward would also lend further support to our broader outlook for risk off trade, with the Yen traditionally correlating to risk and being well bid in safe haven market environments. While we see this correlation breaking down a bit over the medium-term and longer-term and ultimately project additional Yen weakness ahead, over the short-term, we see room for some strength in the Yen. Finally, we will also be monitoring the price action in EURCHF with the market very well supported by the highly publicized 1.2000 SNB floor and recently showing signs of a bullish breakout.

March 15, 2012

Yen Correction on the Horizon?

Filed under: Forex News — Tags: , , , , , , , , , , , , — admin @ 7:48 am

By Joel Kruger, Technical Strategist for DailyFX.com

  • Yen continues to weaken at relentless pace
  • US Treasuries clear key technical level
  • Investors starting to anticipate Fed policy shift
  • EURCHF on the move; SNB rate decision to be digested

Any indications of a technically overbought USDJPY market are useless, with the pair relentlessly pushing higher to leave hourly, daily and weekly studies all highly stretched and begging for a pullback. However, these technical readings have been looking like this for several sessions already and the market couldn’t care less. We have been talking of a major structural shift in this major for some time now and had been looking for the formation of a major longer-term base by the record lows at 75.50 from October 2011. Things have been playing out nicely, although at this point, it would be reassuring to see a bit of a healthy corrective pullback before a resumption of the newly adopted uptrend. The weekly chart offers the most compelling evidence for the onset of a bullish medium and longer-term shift in the trend, with the market recently closing above the weekly Ichimoku cloud for the first time in nearly 5 years. As such, the risks are tilted to the upside and we would not rule out the possibility for a move all the way back towards 100.00 in the months ahead. But once again, we would be most comfortable to see a pullback into the 80.00-82.00 area to allow for stretched technical studies to unwind. Parabolic, one way price action is never healthy and it is better for the market to trend in a more orderly fashion.

Certainly the dramatic shift in the construct of the US treasury markets has also influenced the rally in USDJPY, with 10-year yields jumping back above the 100-day moving average for the first time in nearly nine months. The Fed’s recent acknowledgment of improvements in the labor market could be influencing the price action and investors could now be starting to position for the onset of a less accommodative Fed policy going forward. For now, equity markets have been less sensitive to these subtle hints from the Fed, and remain exceptionally well bid to fresh 2012 highs. However, we feel that equities are far too ahead of themselves at current prices and would soon expect to see a similar response which would open a good amount of profit taking over the coming days. For us, the bottom line is that equity markets are simply not reflective of underlying fundamentals at the moment, and the idea that we have retraced some 85% of the move from the record highs to crisis lows is a little unnerving. The irony is that equity markets have been responding to ultra accommodative Fed policy, but the ultra accommodative and prolonged accommodation also sends a message that things are still not that great. So again, why are equity markets so well bid?

Moving on, another interesting development in the FX world has come from the EURCHF cross rate which is finally starting to move after weeks of barely any movement. The cross had been locked in a single digit range by 1.2050 and just over the 1.2000 SNB floor for several weeks, before finally breaking out back above 1.2100 on Wednesday. Indeed, the thought of buying crossed our minds many times while the market was trading 1.2050 given the very publicized 1.2000 SNB floor, and positive yield differential, but we could not pull the trigger as the trade simply seemed too good to be true. But it was no so, and anyone who bought at 1.2050 is now reaping the rewards. From here, we could still head significantly higher and the long trade is still a possibility, but with the SNB rate decision to be digested today, we will again stick to the sidelines and not look to chase trades.

March 12, 2012

Bank of China to let Market decide Price of Yuan

Filed under: OANDA News — Tags: , , , , , , , , , , — admin @ 7:36 pm

A week after the U.S. Treasury Secretary praised China for its currency stabilizing effort the Bank of China Governor Zhou Xiaochuan has hinted that the bank is moving towards a supply demand model. According to the Vice governor of the PBoC the domestic and offshore markets have started to expect a the Yuan to appreciate and depreciate instead of the continuing appreciation in the last two years.

The trade deficit in the first two months of the year increased due to seasonal factors. China has also hinted at making Yuan denominated loans to emerging economies to boost trade and promote the Yuan. Geithner at the time commented that he does not see that as a threat to the U.S. Dollar, but instead welcomes the move by the Bank of China as it signals the maturity of the currency as it unwinds from very tight controls closer to being priced by market forces.

March 7, 2012

Wednesday Could Be Day of Consolidation With Key Event Risk Ahead

Filed under: Forex News — Tags: , , , , , , , , , — admin @ 7:47 am

By Joel Kruger, Technical Strategist for DailyFX.com

  • Markets consolidate latest declines
  • Aussie GDP weaker than expected
  • Key central bank event risk and US NFPs still to come

Price action on Wednesday has been mostly consolidative thus far, with currencies content on pausing for a breather following some intense selling on Tuesday. More concerns over the state of the global economy have emerged and seem to have shaken the confidence of many traders. Global equities have also finally begun to roll over, after a very solid performance thus far in 2012. The softer than expected Aussie GDP data overnight and earlier downgraded forecasts on China only help to reaffirm the more subdued outlook for the global economy, and we would expect to see more risk off trade over the coming sessions. The Greek PSI talks will also be on radar screens, and this could be a market mover in wither direction pending the outcome. Meanwhile, we still have some major event risk ahead this week with the RBNZ, BOE and ECB all due Wednesday and Thursday, followed by the all important US NFP report on Friday.

March 5, 2012

Investors Look Ahead to Busy Week Stacked with Major Event Risk

Filed under: Forex News — Tags: , , , , , , , , , , , — admin @ 7:45 am

By Joel Kruger, Technical Strategist for DailyFX.com

  • Early signs of risk off trade on Monday
  • EURUSD remains under pressure for now
  • Key central bank rate decisions this week
  • Investors also thinking about US NFPs and next Fed policy meeting
  • Moody’s downgrade of Greece not helping sentiment
  • Commodity currencies underperform; local data not helping

Markets kick off the early week in risk off mode, with currencies and equities mostly pressured against the US Dollar. The reversal in the Euro in the previous week was a rather significant short-term development and many are left wondering whether the market correction in 2012 has finally come to an end in favor of broader underlying bear trend resumption off of the 2008 EURUSD record highs. There is quite a bit of event risk on the horizon, and the week is packed with central bank meetings and the all important monthly NFP report out of the US. The RBA will be the first central bank to decide on policy this week, although it is widely anticipated that they will leave policy unchanged. The RBNZ, BOE and ECB are due later in the week and also expected to remain on hold. Market participants will also be looking beyond this week to the next Fed rate decision, which could ultimately prove to be a very big market mover.

There have been signs in recent weeks that we could be on the verge of seeing a bit of a shift in the monetary policy outlook, and many are speculating that the Fed may even remove their ultra low rates through 2014 language. This would be a USD bullish development as it would start to narrow yield differentials back in favor of the buck across the board. For now, the focus is on the latest Moody’s downgrade of Greece to the lowest level, with the rating agency citing a very real risk of default with the PSI debt swap inching closer. Aussie and Kiwi have been the weakest currencies on the day given the risk off theme, but the currencies have also come under added pressure on weaker local data with Aussie AIG-CBA PSI dropping well below the 50 boom/bust level and Kiwi January migration showing a loss of 650.

March 2, 2012

A Week in Review; Risk Correlated Assets Remain Well Bid, But Why?

Filed under: Forex News — Tags: , , , , , , , , , , , , , — admin @ 7:54 am

By Joel Kruger, Technical Strategist for DailyFX.com

  • LTRO and Bernanke behind us and risk still bid
  • S&P offers concerning and appropriate comments on LTRO
  • Fed Chair Bernanke a lot less dovish than markets desire
  • Outlook favors a pullback in global equities and higher yielding currencies

The week is nearly at an end and two major events are now behind us with the ECB LTRO complete and Fed Chair Bernanke offering his outlook for the US economy. The net result in the currency markets has been mixed, with the US Dollar finding bids against the Euro and Yen, but at the same time falling victim to the higher yielding and more risk correlated currencies. We are somewhat surprised with this reaction given the events of the week, particularly with the US Dollar selling against many of the higher yielding currencies.

While there were certainly a good deal of positives to come from the LTRO, the event itself reflects an economy that is still very much in trouble, with a good deal of work ahead before we will see meaningful recovery. While this week’s Euro drop was quite appropriate given what we have just said, other currencies seemed to not be too concerned with additional risks to the Eurozone and threat of contagion. We think the latest S&P assessment of the LTRO is accurate, with the rating agency saying that the ECB operation fails to “address the underlying structural issues in the banking sector.” This in our opinion highlights certain fundamental risks which should not support risk correlated assets, or higher yielding currencies which could very well be exposed to the structural problems in the Eurozone.

Moving on, the second major event of the week, Fed Chair Bernanke’s economic assessment, has also been anything but positive for risk assets. Up until this point and throughout the economic crisis, market participants have been using the central bank’s commitment to ultra accommodative policy as an opportunity to fund their equity investments at historically low rates. Although on the surface the message of ultra accommodation for an extended period of time should be disturbing (as it also means that the economy is not in great shape), investors have disregarded this part of the message and focused only on the fact that money is going to be very cheap for a very long time and therefore have mitigated risk in putting their money to work. While we understand this logic, we have always had a difficult time accepting the fact that equities and other risk correlated assets should be so well bid on the incentive in investing in them rather than on the value of the actual securities themselves.

In is testimony, Mr. Bernanke should have taken the wind out of the sails of risk bulls by adopting a much less dovish tone than that for which markets had hoped. Firstly, the Fed Chair made no mention of another round of quantitative easing or monetary policy accommodation; secondly, he reminded investors that the language of rates being low for an extended period of time was not set in stone. Again, as things have been correlating, this in theory should be an equity and risk negative event, with the message that rates may go higher earlier than we think and that with the US economy showing signs of recovery, this is certainly a more realistic possibility. For investors, this means potential trouble, as the combination of an only recovering economy (i.e. still difficult economy), with higher rates, will make things much less attractive in terms of risk incentive, spending, and local equity markets.

Overall, given these two major developments, we have a hard time arguing for another surge in risk correlated markets and continue to hold onto a very bearish outlook from here on global equities, and risk correlated currencies like the Australian Dollar, New Zealand Dollar, Canadian Dollar, and emerging market FX. We think the global outlook is not favorable for these markets and would therefore expect to see some major underperformance here going forward. We are also certainly in the minority here, and to this point, there has been no real confirmation in price action to validate our call. Still, with US equities so close to record highs from 2007, and with the commodity bloc currencies trading by longer-term cyclical highs, we wonder how much longer it will be before our outlook materializes. Looking back at this past week, we have every indication that could be very soon.

February 29, 2012

Eurepean Central Bank LTRO Results in Choppy Intraday Trade

Filed under: Forex News — Tags: , , , , , , , — admin @ 8:19 am

By Joel Kruger, Technical Strategist for DailyFX.com

February 17, 2012

Euro Ticks Higher as ECB Swaps Bonds; Yen in Free Fall

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 9:14 am

By Christopher Vecchio, Currency Analyst for Dailyfx.com

Fundamental Headlines

- ECB Plan to Shield Its Greek Bonds May Subordinate Some Holders – Bloomberg

- Germany Seeks to Avoid Two-Step Vote on Greek Aid – Bloomberg

- Inflation Heats Up on Gasoline Prices – Reuters

- Germany, Bank Ease Tensions on Bailout – WSJ

- U.K. Retail Sales Stronger Than Expected – WSJ

European Session Summary

Overnight price action yielded little indication of whether Friday would be a risk-on or risk-off day to end the week. The U.S. Dollar was slightly stronger against the Australian and Canadian Dollars, while the New Zealand Dollar was tied with the Euro for the top performer. Ranges were tight, however, with all of the majors – save the Japanese Yen – trading within a +/- 0.30 percent range against the U.S. Dollar, at the time this report was written.

The big news – or what should be big news – is that the European Central Bank has participated in a Greek bond swap. According to sources, however, the bonds are simply being rolled over: the ECB will receive similar bonds at the same value. As per information DailyFX Quantitative Analyst David Rodriguez has notified me of, it appears that the ECB may also be considering allowing the Greek bonds held in national Euro-zone banks’ portfolios to be subjected to the same conditions private investors are readying to take.

Beyond this, the International Monetary Fund has tentatively announced that it will only contribute €13 billion of the €130 billion in the second bailout package, which means, should this be the case, Euro-zone governments will have to up their contributions (the European Troika is looking rather weak in this regard). Given the rhetoric out of Dutch, Finnish, and German parliaments, I remain highly skeptical that this will occur. Greece will default, and while I’ve previously stated that this could happen in mid-March, this accelerates the timetable to as soon as this weekend.

As mentioned in yesterday’s report, on Wednesday, Greek President Karolos Papoulias blatantly attacked the Euro-zone core – the group tasked with saving Greece – saying, “Who is Mr Schaeuble to insult Greece? Who are the Dutch? Who are the Finnish?” This infighting is not to be taken lightly; the renationalization of Europe would result in a politically fractured continent and the breakup of the Euro-zone. For those that disagree, the cultural heterogeneity of the region will make it impossible to have sustainable peace over the long-term, and that a unified and peaceful Europe is an outlier in the grand scheme of human history.

EUR/USD 5-min Chart: February 17, 2012

Charts Created using Marketscope – Prepared by Christopher Vecchio

Overall, the Euro was the top performer on the day at the time this report was written, just up over 0.20 percent. The most interesting price action by far comes from the USDJPY, which now having declined by over 0.42 percent at the time of writing, has pared over 2.00 percent in just the past week alone. This comes after the Bank of Japan announced another stimulus package totaling ¥10 trillion ($128 billion), to be used to boost asset purchases in order to help pull the country out of a two decade long deflationary spiral (it will not).

As discussed in last week’s Japanese Yen Weekly Fundamental Forecast, I expect these measures to fail once more, and that the simple effort of flooding the market with liquidity has and will prove ineffective. The USDJPY is expected to continue to strengthen over the course of the year, ultimately settling at or above 90.000.

24-Hour Price Action

Key Levels: 14:20 GMT

February 10, 2012

Loonie Loosens the Death Grip

Filed under: OANDA News — Tags: , , , , , , , , , , , , , — admin @ 12:45 pm

The loonie has finally broken out of that death grip range that we were beginning to become accustomed to midweek. At the time it seemed that everyone was afraid to do anything. However, once the risk adverse trading strategies again became in vogue, especially after the Euro finance minister agreed to hold back Greek aid, the dollar got its second wind and headed strongly north of parity. The risk reward play had short term players selling the CAD below parity. [...]



Read the full article on forexblog.oanda.com.

February 8, 2012

Best performer – EUR/USD

Filed under: Forex News — Tags: , , , , , , , , , , , , , , — admin @ 7:30 am

The euro seems to have a mind of its own today being the best performer out the risk currencies, reaching levels we haven’t for 2 months. Perhaps statements from Sarkozy and Merkel that Greece will not be allowed to go bankrupt has helped boost confidence in the single currency and as Greece and the troika are putting the finishing touches on the terms required for a 130 billion-euro ($173 billion) bailout package. The market is looking at the ‘outcome glass’ as half-full. Technically if today’s low of 1.3244 (38.2% fib level) holds and euro continues with the momentum, the 50% retracement is within reach at 1.3435.  At this time it may be ripe to look for rallies to sell for the long term.

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