EUR/USDStrategy: Bullish at 1.5730, Targeting 1.6000
Last week, EURUSD rose from support near 1.5340, a level where an upward-sloping trend line and the 61.8% Fibonacci retracement of 1.4439 –1.5900 rally intersect. The ascent was once again capped at 1.5900, last week’s target level. The pair now finds itself range-bound between the highest close of the previous bullish run near 1.5730 and the 1.5900 double top. For the uptrend to be violated, EURUSD would need to close below 1.5730. As that has not been the case, we see current price action as consolidation rather than a trend change. The current lull looks to owe itself to looming event risk, with ISM Manufacturing data due tomorrow and Nonfarm Payrolls on Friday. As the docket clears, we see a return to upside momentum eyeing a test of the psychologically significant 1.6000.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-31-08_EUR.jpg
GBP/USD
Strategy: Flat at 1.9800, waiting for confirmation
Last week, we saw sterling resume the bullish run, rallying from trend line support to reach our target of 2.000. Liming our upside here proved wise - GBPUSD put in a top closely nearby at 2.0090, the 61.8% Fib of the 12/12/07 – 01/22 decline. The pair has since declined all the way back down to close below trend line support. The last remaining hurdle remains at the 38.2% Fibonacci retracement level found near 1.9800. Should GBPUSD close below that, the path is clear for downside as low as 1.9330. We will opt to stay on the sidelines for the moment, waiting to see how price action reacts at Fib support.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-31-08_GBP.jpg
USD/JPY
Strategy: Flat at 100.00, waiting for confirmation
USDJPY has done little since putting in a bottom at the 161.8% Fibonacci extension of the 117.90 – 104.84 down move. Last week’s price action was marked by a tight range between 100.70 and 98.50. With most recent US data shifting from “bad” to “mixed”, the current lull makes sense with traders holding out for ISM and NFP this week before committing to any directional moves. That said, the USDJPY has seen close correlation to stock indices and overall risk sentiment in recent months. The latest monetary easing by the Fed has been seen as accommodative, suggesting the pair has scope to move up higher as jittery markets calm their nerves. Though we remain on the sidelines at the moment, our bias leans bullish. We will look for a close above 100.70 to go long, targeting a return to 105.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-31-08_JPY.jpg
USD/CHF
Strategy: Bearish below 0.9840, Targeting 0.9640
Having concluded a bout of greenback strength, the USDCHF paused at the 61.8% Fibonacci retracement of the 1.1108 – 0.9647 decline near 1.02. Our bearish bias has been validated, though the pair failed to revert all the way the wick low at 0.9640. Presently, the pair has found support just above 0.9840, a level corresponding with the 3/17 close, a record lowest. Our bias remains bearish in the near term. As with the EURUSD, the threat of major US data presents an event risk that should USD bears from picking up significant traction. Once the docket clears, we expect the down trend to resume.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-31-08_CHF.jpg
USD/CAD
Strategy: Bearish against 1.0250, Targeting 0.9860
The loonie has perpetually ignored the other majors, remaining range-bound while the others swung fantastically to record levels. Though it briefly peaked above the range top at 1.0249 in January, the move turned out to be a head-fake: USDCAD promptly fell back into familiar territory, bracketed on the bottom by the 38.2% Fibonacci retracement of the 0.9055 – 1.0249 rally. Last week, the pair began a decline from the same, familiar resistance but was stopped short. A second Fibonacci retracement drawn from the 01/22 false break top along the decline to the range bottom places a 61.8% retracement level at 1.0121. USDCAD spent last week bound to this smaller sub-range and now finds itself at the top yet again. With no significant evidence to contend a change in the range bound dynamic, our strategy remains to short the pair back down to established support level.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-31-08_CAD.jpg
AUD/USD
Strategy: Bullish against 0.9119, Targeting 0.9500
As we suggested last week, the AUDUSD bounced from support at the long-term trend line established on 08/17/07 to take out the 61.8% Fib of the 01/22-02/28 rally at 0.9119. The pair stalled after testing the 0.9200 level, following the other majors in a mild easing of dollar weakness. Currently resting above 0.9119, AUDUSD looks poised to resume upside momentum as the calendar moves past ISM and NFP event risk. We remain bullish, eyeing a re-test of the double top at 0.9500.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-31-08_AUD.jpg
NZD/USD
Strategy: Bearish against 0.7900, Target TBD
The Kiwi dollar’s decline has penetrated the 38.2% retracement of the 0.7380 – 0.7897 rally, accelerating downward. Looking ahead, significant support levels remain at 0.7799 and 0.7702, the 50% and 61.8% Fibonacci retracements of the same rally. Our bias has shifted to from neutral to bearish below 0.7900, though we will hold off on locking in a target as we monitor future price action at the aforementioned Fib support levels.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-31-08_NZD.jpg
EUR/USD
Is 1.6000 next?
Last week, we identified a hammer at the EURUSD trend line support and advocated a long position targeting 1.5740, above the highest close of the preceding bullish run. Our reasoning was validated, yielding over 300 pips in profit.
Having closed above 1.5740, the EURUSD price action has consolidated in a tight 130-pip range. The pair showed a Hanging Man bearish reversal pattern following the close above the previous top, suggesting the up move was exhausted for the time being. The subsequent downside has been limited however, with the pair looking to be consolidating above resistance-turned-support at 1.5730. Having failed to violate the up trend, the EURUSD retains a bullish bias. On balance, US economic data turned from bad to mixed last week, so price action may continue to lack a clear direction until Friday’s Nonfarm Payrolls release. Though we will continue to buy the pair, the lack of a strong signal means we will keep a close eye on price action and cut losses quickly as we look for a test of the psychologically significant 1.6000 figure.
EUR/USD Trading Strategy
1. Long EURUSD closely above support at 1.5730.
2. Set stop above 1.5630, a prior support/resistance area.
3. Set profit target near 1.6000, risking 100 pips to gain about 270.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-30-08_EUR.JPG
GBP/USD
Another retracement, another entry opportunity
Last week, we bought GBPUSD following a Bullish Engulfing pattern above support at 1.9740 targeting trend line resistance below 2.0208. The pair reached a high of 2.0191, coming within 17 pips of the target level we were looking at. As we have noted here before, traders need to be flexible with setting their stop-loss and profit target levels. Support and resistance often lies within a 10-20 pip range rather than a single price point. In our case, we took profit the day following the Star candle establishing the weekly high for positive gains over 300 pips.
Following the run up to resistance, the pair retraced to find support above price congestion in the 1.9900 – 1.9750 area. We have also identified a supporting trend line intersecting with a multiple support/resistance level just below 1.9900. The current candle looks to be shoring a Hammer, though we can’t be certain that will remain the case until it closes. Still, with no compelling evidence to change our mind, our bias on GBPUSD remains bullish. We look for an entry above support near the 1.9900 mark, aiming just below the 3/16 wick high close to 2.0278.
GBP/USD Strategy
1. Long GBPUSD above 1.9900
2. Set profit target just below 2.0278
3. Set stop-loss just below the price congestion at 1.9850, risking 150 pips to gain 378.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-30-08_GBP.JPG
USD/JPY
Range trading dominates price action
Having stabilized following a break past long-term support at 101.69, we were expecting USDJPY to present an upside opportunity. While the pair did not break down to hit our stop-loss, it failed to rally as well. Instead, USDJPY spent last week oscillating in a range between 98.90 and 100.70. Having entered long above 99.90, we closed out our trade at break-even as price action stalled.
Looking ahead, USDJPY does not present a clear signal for a directional move. However, given the pair’s penchant for following risk sentiment, we will opt not to range trade here given the proximity of multiple significant economic data releases. Instead, we will look for a daily bar close beyond current range boundaries. We will then reassess our bias, and establish a position accordingly.
USD/JPY Strategy
We remain flat as we wait for confirmation of a directional bias.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-30-08_JPY.JPG
USD/CAD
Range remains intact, waiting for a catalyst
Last week, we noticed a range that has contained price action since mid-November. A false break occurred in January, but the pair reverted back into the range and has in recent days established an Evening Star bearish reversal formation at top-side resistance. A significant down move failed to materialize, with consolidation in a smaller sub-range between the larger top at 1.0252 and 1.0090.
With pricing generally unchanged on the week, our posture on USDCAD remains unchanged. We favor a short below top-side resistance towards the bottom of the range.
USD/CAD Strategy
1. Short USDCAD below 1.0250.
2. Set stop loss near 1.0390, above the false break high.
3. Set profit target above 0.9870 at the most recent wick low and above the range bottom.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-30-08_CAD.JPG
AUD/USD
Holding on for more upside
Last week, we noted a Morning Star formation at trend line support, a strong reversal signal. Citing an attractive yield gap of 5.00%, we established our long term bias for AUDUSD as bullish. Though the pair saw an up move from our entry above 0.9030 to reach a high of 0.9252 (222 pips), it failed to rally as high as our target below 0.9360.
Currently, price action has surpassed a multiple support/resistance level at 0.9113 and has stabilized. We will move our stop loss up to break even around 0.9030, eliminating the downside and continuing to hold for last week’s target.
AUD/USD Strategy
1. Holding long above 0.9113.
2. Set stop break even, equal to the entry price for last week’s long position near 0.9030.
3. Set profit target just below 0.9360, the site of wick highs following the previous support break.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-30-08_AUD.JPG
NZD/USD
Consolidation delays bearish reversal
Last week, we opted to remain on the sidelines in NZDUSD. We noted a Morning Star pattern above support at 0.7872, coinciding with the first test trend line support test at the beginning of this month. We cautioned that the monthly NZDUSD chart suggests a long-term resistance level in place since 2003 coinciding with the 0.8200 level.
This week, the pair offers little by way of new insights. While the anticipated bearish run has yet to validate itself, our suspicion that the Morning Star bullish reversal pattern would see little follow-though proved accurate. Price action has remained range-bound, oscillating between 0.7880 and 0.8100. Without a clear candlestick signal to guide our thinking, we will hold off on taking a trade on NZDUSD. That said, our bias remains cautiously bearish. We will look for a daily bar close beyond the lower range boundary. Should that materialize, we will enter short below 0.7880 targeting 0.7390.
NZD/USD Strategy
We remain flat as we wait for confirmation of a directional bias.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-30-08_NZD.JPG
EUR/USD
Ready to resume ascent?
Last week, we noted EURUSD price action had presented an inverted hammer candlestick, signaling a possible bearish reversal. That view has now been confirmed - the pair tumbled the following day. Our entry below 1.5800 yielded over 500 pips in profit, though our profit target of 1.5320 was narrowly missed by 20 pips (EURUSD reached a low of 1.5340 last week).
Having completed the expected retracement, we now find the EURUSD at trend line support, with a Hammer reversal pattern waiting to be confirmed by a bullish candle. If that materializes, we will look for the bullish trend to resume. Those traders that have not taken profit on our suggested short position should do so here. With the long term bias still favoring the upside, we will re-enter long at trend line support with a tight stop in place should the pair break down further. Our initial profit target will eye the top of the most recent bullish run to 1.5740. However, we will keep a close eye on the pair’s momentum and adjust the profit target contingent with the price action.
EUR/USD Trading Strategy
1. If the Hammer formation is confirmed with a bullish candle, long EURUSD near 1.5380 (trend line support).
2. Set stop near 1.5270, just below the wick low of the 03/06-03/09 consolidation.
3. Set the initial profit target just below 1.5740, giving a favorable risk-reward ratio (risking 110 pips to gain 360).
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-24-08_2.jpg
GBP/USD
Retracement offers advantageous entry for long trade
Last week, we saw the GBPUSD testing the upward sloping trend-line at 2.0040, with a multiple resistance-turned-support level firmly in place below. At that time, we chose to remain flat as the pair settles towards support with a medium-term bullish view from there. This proved wise – cable broke through the trend line to settle at the next support level above 1.9740. Waiting for confirmation is critical to sound technical analysis, and our patience last week has offered us a favorable entry point.
With the long term trend still biased to the upside, we will look to enter long above support at 1.9740 targeting trend line support turned resistance at 2.0208. An extended Abandoned Baby formation as well as a bullish engulfing pattern lends credence to our expectations of a reversal for another run to the upside.
GBP/USD Strategy
1. Long GBPUSD above 1.9740.
2. Set profit target just below 2.0208.
3. Set stop-loss just below the price congestion at 1.9620. This will give excellent risk-reward parameters (risking 120 pips to gain 468).
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-24-08_3.jpg
USD/JPY
Decline stabilized, eyeing up move
Last week the USDJPY was in a free-fall, having broken below medium term support above 103.00 and the long-term support at 101.69. We chose to remain neutral, waiting for the pair to offer a good entry point. As with the sterling, this proved wise. The pair found a bottom above 97.40 and has stabilized.
The pair now shows a bullish Three White Soldiers reversal pattern. Yesterday’s bullish candle also closed above the high for last week, lending further weight to an argument advocating the upside.
USD/JPY Strategy
1. Long USDJPY above 99.90
2. Set stop near 97.50, above the pair’s recent bottom.
3. Set profit target below 105.50, the bottom of the range broken in late February to initiate the most recent bearish decline.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-24-08_4.jpg
USD/CAD
A rare range trade amid market volatility
We opted to wait for confirmation on USDCAD last week, seeing a flag continuation pattern in the weekly bars and looking for downside break. Once again, waiting to have our view validated proved critical, as the USDCAD broke up rather than down.
Now looking at a daily chart, we notice a range that has contained price action since mid-November. A false break occurred in January, but the pair reverted back into the range and has in recent days established an Evening Start bearish reversal formation at top-side resistance.
USD/CAD Strategy
1. Short USDCAD below 1.0250.
2. Set stop loss near 1.0390, above the false break high.
3. Set profit target above 0.9870 at the most recent wick low and above the range bottom.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-24-08_5.jpg
AUD/USD
The stars align for a top-side move
Last week, we opted to remain on the sidelines waiting for the pair to fail to close below the trend line at 0.9230 and show a bullish candle to signal a long entry. Once again, our cautious approach proved prudent - support gave way, seeing the AUDUSD fall support at a longer-term trend line established in August of last year.
With a yield gap of 5.00%, our long term bias for AUDUSD remains bullish. This view is validated by a Morning Star formation at trend line support, a strong reversal signal.
AUD/USD Strategy
1. Long AUDUSD above 0.9030 near trend line support.
2. Set stop above 0.8875, below the trend line and just above a price congestion area seen Oct-Dec ’07.
3. Set profit target just below 0.9360, the site of wick highs following the previous support break.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-24-08_6.jpg
NZD/USD
Bearish reversal imminent?
Last week, we advocated a long position at 0.7934 with a target just below 0.8200. The trade’s success depended on each trader’s preferred target. In our case, we set the target at 0.8175 where it was narrowly missed (the high was 0.8172) before the Kiwi dollar collapsed through trend line support. We were stopped out with a loss of 80 pips, which was more than made up for by our successful EURUSD trade. The lesson to be learned here is to avoid round numbers and multiples of five when setting stop and limit levels, as those tend coincide with psychological support/resistance points.
We also noted last week that the monthly NZDUSD chart suggests a long-term resistance level in place since 2003 coinciding with the 0.8200 level. Given last week’s support breach, this may in fact prove to be the site of a major trend reversal. The pair seems to have found support at 0.7872, coinciding with the first test trend line support test at the beginning of this month. A Morning Star reversal pattern has been shown, but it has failed to break back over the trend line, suggesting this may simply be a consolidation move prior to a downside drop. Our bias has shifted from bullish to a cautiously bearish one. We will wait for confirmation before taking a trade on NZDUSD.
NZD/USD Strategy
We remain flat as we wait for confirmation of a directional bias.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/03-24-08_7.jpg
EUR/USD
Strategy: Bullish against 1.5410, Targeting 1.5900
Having put in a top at 1.5900, the EURUSD finally took a respite from its break-neck ascent with a retracement to support at 1.5337. This level sees the intersection of an upward-sloping trend line as well as the 61.8% Fibonacci retracement of 1.4439 – 1.5900 rally. The single currency did not wait at support for long, surging higher again after the brief breather. Our bias remains bullish, aiming for a retest of the top at 1.5900.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/FW_03-24-08_1.jpg
GBP/USD
Strategy: Bullish against 1.9853, Targeting 2.0000
Closely mirroring the dynamic of the EUR, the sterling spent last week in a retracement period as dollar bears eased their assault on the troubled greenback. GBPUSD declined to 1.9756, a dual support level marked by an upward sloping trend line and the 38.2% Fibonacci retracement of the 1.9361 – 2.0397 rally. The similarity with the EURUSD suggests both pairs are singularly driven by broad sentiment towards the US dollar. Poised to resume the bullish run, cable now eyes the 61.8% Fibonacci retracement of the aforementioned rally at the psychologically significant 2.0000 level.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/FW_03-24-08_2.jpg
USD/JPY
Strategy: Bullish against 98.81, Targeting 104.80
The dollar rallied nearly every currency last week, and the Yen was no exception. The pair put in a bottom at the 161.8% Fibonacci extension of the 117.90 – 104.84 down move and pushed back up over the critical 100.00 mark. The USDJPY has seen close correlation to stock indices and overall risk sentiment in recent months. Last week’s actions by the Fed have generally been seen as accommodative, suggesting the pair has scope to move up higher as jittery markets calm their nerves. Our bias shifts to bullish, targeting a return to levels near the 105.00 mark. We will be sure to use very conservative stop-loss policy however, as any market news that re-introduces risk aversion to the market will surely see USDJPY tumble once again.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/FW_03-24-08_3.jpg
USD/CHF
Strategy: Bearish against 1.0175, Targeting 0.9450
Though not historically considered to be highly correlated pairs, USDCHF and USDJPY have been moving in lock-step since September 2007. The relationship no doubt owes its existence to both currencies’ connections with risk sentiment – CHF is a stand-by “flight to safety” currency while USDJPY has been religiously following the swings in equity indices as the sub-prime fiasco exploded on the scene last summer. A key difference, however, is that while the Yen appears to have some up-side left, the Swissie has begun to look more like the inverse of the EURUSD that we always thought it was. Having concluded a bout of greenback strength, the pair paused at the 61.8% Fibonacci retracement of the 1.1108 – 0.9647 decline. We see this level holding, with USDCHF resuming downward momentum towards the 0.9650.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/FW_03-24-08_4.jpg
USD/CAD
Strategy: Bearish against 1.0250, Targeting 0.9860
The loonie has perpetually ignored the other majors, remaining range-bound while the others swung fantastically to record levels. Though it briefly peaked above the range top at 1.0249 in January, the move turned out to be a head-fake: USDCAD promptly fell back into familiar territory, bracketed on the bottom by the 38.2% Fibonacci retracement of the 0.9055 – 1.0249 rally. Now looking decidedly bearish below the same, familiar resistance, the pair eyes trend line support at 0.9860. The same old Fib level is close below, so a continuation of the ranging dynamic we have noted is likely to remain intact.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/FW_03-24-08_5.jpg
AUD/USD
Strategy: Bullish against 0.9119, Targeting 0.9500
Having established a double top at 0.9500, the AUDUSD retraced all the way down to a long-term trend line established on 08/17/07. That proved adequate support, as Aussie bulls mounted a come-back to test the 61.8% Fib at 0.9119. A break of resistance here would ignite a rally back for another test 0.9500. We will look for a close above 0.9119, then enter long with a tight stop just below the Fib support. Should the pair fail to close above 0.9119, we will remain flat awaiting confirmation of a directional bias.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/FW_03-24-08_6.jpg
NZD/USD
Strategy: Flat at 0.8020, waiting for confirmation
Having penetrated through the upward-sloping trend line established 01/22/08, the Kiwi dollar’s decline was halted by the 38.2% retracement of the 0.7380 – 0.7897 rally. Since then, price action has returned to the trend line support-turned-resistance and is testing that level in an attempt to regain bullish momentum. We reserve taking a directional bias on this pair as we wait to see where the current candle closes.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/FW_03-24-08_7.jpg
Hedging Strategy of the Week
Currency Pair: AUDCAD
Long Term Bias: Bullish
Long Term Position: Holding Long (from 12/28 swing low at 0.8535)
Short Term Bias: Bearish
Short Term Position: Short Against 0.9375 (range top), Target 0.9100 (rising trend)
The AUDCAD has provided a very consistent rising trend since the beginning of the year. However, recent price action has seen the pair hemmed in by a range that has left us to congestion. Considering the medium-term outlook for interest rates, we want to stay with the bullish trend and hedge any drawdowns that may result from the preponderance of the temporary range. Traders that are already in a profitable long position or are looking to enter at a good price should consider a hedge in a short AUDCAD trade with a stop above 0.9375/9400 and a limit near the rising trend seen below (around 0.9110 on 3/19). Should our hedge position reach its target, we will profit from a rebound to the upside; and if it is stopped out, our long-term position will benefit from the break and follow through momentum to the upside. The long-term position should have a stop as well, below 0.9050.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/Hedge/johnhedgetrade319-01.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/Hedge/johnhedgetrade319-02.gif
EUR/USD
Strategy: Bullish against 1.5300, Targeting 1.5970
The EURUSD’s advance seems insatiable. The pair has gathered speed since overtaking 1.5000 and officially breaking free from a four-month old period of congestion. We will keep with the dominant trend and maintain our long position until there is a retracement that threatens to break the euro’s bullish advance. Since our target has once again been achieved and surpassed, we have notched our upside objective up to the 161.8% extension of the 8/16 to 11/23 advance at 1.5970. And, since this target is so close to the next major milestone at 1.60, we can use either number interchangeably as an ultimate target. To protect our profitable position, we have also moved up our soft stop to 1.5300 where price congestion happens to fall in line with a 38.2% retracement of the 12/20 to 3/17 advance. Caution should be taken however in the near-term given the proximity of the heady FOMC rate decision event risk.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/fib_trader_031808_2.gif
GBP/USD
Strategy: Bullish against 1.5300, Targeting 1.5970
The EURUSD’s advance seems insatiable. The pair has gathered speed since overtaking 1.5000 and officially breaking free from a four-month old period of congestion. We will keep with the dominant trend and maintain our long position until there is a retracement that threatens to break the euro’s bullish advance. Since our target has once again been achieved and surpassed, we have notched our upside objective up to the 161.8% extension of the 8/16 to 11/23 advance at 1.5970. And, since this target is so close to the next major milestone at 1.60, we can use either number interchangeably as an ultimate target. To protect our profitable position, we have also moved up our soft stop to 1.5300 where price congestion happens to fall in line with a 38.2% retracement of the 12/20 to 3/17 advance. Caution should be taken however in the near-term given the proximity of the heady FOMC rate decision event risk.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/fib_trader_031808_3.gif
USD/JPY
Strategy: Bearish against 103.60, Targeting 95.15
Our bearish outlook on USDJPY has served us well. The flight from risk and high yielders has accelerated the yen’s advance against the battered greenback. Last week’s target of 100 was easily surpassed in a momentous drop that was spurred last Friday. Given the new depths USDJPY is plunging, we need to rely once again on Fibonaccis for our target. Pulling the last major bear swing from 12/27 to 1/23, we can see that the 200% extension lies just above 95 – a notable level in itself. Our stop has been moved up, but modestly. A reversal and change in our outlook for the USDJPY will need to counter a lengthy trend. Therefore, we remain bearish against 103.60. Cautious traders should drop their stops down considerably.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/fib_trader_031808_4.gif
USD/CHF
Strategy: Bearish against 1.0175, Targeting 0.9450
Dollar selling continues to depress USDCHF to record lows. Recently, the pair’s decent has been especially intense; which means finding reliable targets and stops is that much more difficult. As testament to the sharp advance of the Swiss franc, it is even becoming difficult to find targets below parity through Fibonacci extensions. However, the major 161.8% extension of the 3/10/2006 to 11/23/2007 is called up around 0.9450. This is a considerable distance from spot; but given recent volatility could easily be met within a few days time. Of greater importance is protecting a profitable short position with a trailing stop. We will not flip to a long-term bullish bias without a major reversal, but a more near-term stop is necessary nonetheless. We have moved our soft-stop up to 1.0175 as an immediate floor for our floating profit.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/fib_trader_031808_5.gif
USD/CAD
Strategy: Flat, waiting for confirmed move below 0.9560 or the bull trend to retake 1.0200
The loonie continues to make its own rules. Momentum behind dollar selling dies out as quickly as it is born and trendlines and Fib retracements fall as if they weren’t even there. We remain flat on this pair, awaiting a substantive break that defines direction. To the downside, a move below the 50% retracement in the 11/07 to 1/22 advance would provide confidence in building momentum, but a drop below the 61.8% figure of that same rally at 0.9560 will be our ultimate entry. For continued development to the upside, we will wait for the recent swing high at 1.02 to fall before contemplating a long position.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/fib_trader_031808_6.gif
AUD/USD
Strategy: Bullish against 0.9105, Targeting 1.0000
The Aussie dollar’s multi-decade high at 0.95 may be too strong a nearby resistance to be easily surpassed under normal market conditions. AUDUSD has retested its recent swing high and low, at 0.95 and 0.9125 respectively, suggesting the lethargy of range trading may be taking over price action. Regardless, our bias remains with the long-term rising trend, and the recent congestion extreme low will merely stand as a marker for our stop. A 38.2% Fib retracement of the 1/22 to 2/28 upswing stands as a barrier for price action and our bullish bias. Considering the Aussie’s tight correlation to risk trends, volatility can surge suddenly and therefore a tight stop and aggressive target will serve us well.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/fib_trader_031808_7.gif
NZD/USD
Strategy: Bullish against 0.7800, Targeting 0.8200
Confidence in the kiwi’s advance has eroded along with the general appetite for high yield around the currency market. Putting in for a very notable double top at 0.8210, the NZDUSD’s upside momentum has clearly ebbed. Our bias stays with the long-term trend in looking for an eventual break to new post-float highs for the kiwi dollar; however, we must also keep our stop nearby so as not to give back too much profit on our bullish run. The 38.2% Fibonacci retracement of the 1/22 to 2/27 rally has stood up to a recent downswing, but unconvincingly. A soft-stop at the 50% retracement of the same upswing seems prudent.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/fib_trader_031808_8.gif
Trading the News: FOMC Rate DecisionWhat’s Expected
Time of release: 03/18/2008 18:15 GMT, 14:15 EST
Primary Pair Impact : GBPUSD
Expected: 2.25%
Previous: 3.00%
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/TTN/03.17.2008.img1.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/TTN/03.17.2008.img2.gif
How To Trade This Event Risk
Financial markets may be on the edge of collapse and the US economy already steeped in its first recession since the early 90’s. Conditions have grown progressively worse over the past few weeks and months as confidence in the credit markets has crumbled and unemployment has signaled the end of the consumer’s support for growth. However, what makes the situation even more dire is that policy makers efforts’ to stabilize the markets have all failed. Since September, the Federal Reserve has taken dramatic steps to try and jumpstart the markets. Their effort have run the gamut with verbal intervention, emergency lending, lowering the discount rate and repeated cuts to the Fed Funds Rate. The most recent round of policy shifts has been the most dramatic yet. The last monetary policy meeting in late January brought an unexpected 75bp cut to the benchmark lending rate and the discount rate followed by a scheduled 50bp cut to both measures a weak later. Though this was the largest cumulative easing to lending rates in a single month since 1984, the market wouldn’t respond. More recently, the Fed has tried to stabilize the markets through its other policy devices. The most significant effort has come in the past week when Governor Ben Bernanke has opened the discount window and promised $200 billion of temporary loans to large banks that could be accessed with investment-grade mortgage back securities as collateral. Looking ahead to Tuesday’s rate decision, investors will be looking for a dramatic move from the Fed to save the economy. However, while a dramatic shift in interest rates may help the economy and financial markets, it could also drive the dollar to even greater lows.
A dollar-positive outcome for the rate decision is a low probability, because what is good for the currency is not good for the economy. Interest rates are a primary component of a currency’s value; but lower encourage lending and economic activity. It is clear from the Fed’s policy over the past six months that the Fed is more concerned with growth and financial markets rather than the dollar.The market haas already accounted for this and has discounted a high probability of a full percentage rate cut. There, we will look for a 50bp or shallower cut (and perhaps increased liquidity) as a dollar-bullish outcome for this event risk. With a confirmed, bullish slant to the data we will look for a five-minute red candle to confirm entry on two lots of GBPUSD. Our initial stop will be set at the nearby swing high (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion (with a mind to support around 2.00 and 1.9750) and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.
On the other hand, a bearish outcome is already heavily discounted. We will need a cut that is at least greater than the official consensus (75bp) to encourage a directional trade. We will follow the same strategy for a short as the long above, just in reverse.
How much do you think the Fed will cut on Tuesday? Cast your vote and discuss Dollar's reaction in the DailyFX Forum.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/TTN/03.17.2008.img3.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/strategy_pieces/tof/3-16-08_3-21-082.gif
A Run on the Dollar?
It was another terrible week for dollar bulls culminating in an announcement on Friday that Bear Stearns, the fifth largest US securities firm was on the verge of running out of cash and in need of a bailout by the Fed. The shock of the news sent the dollar below 100 to the yen and the Swissie and further record lows against the euro.
The US economy continues to play out a nightmarish scenario of financial collapse and the dollar is now in danger of tipping into an all out panic liquidation with economic news mattering less and less as sentiment drives volatility through the roof. Perhaps, if theBear can survive the week finding a white knight to rescue it, US capital markets will calm down. However, if the firm implodes the shock to the US financial system is likely to be so severe that a full run on the dollar may ensue
Next week the market will follow the Bear story and will then quickly turn its focus to the FOMC rate decision on Tuesday.Most analysis were looking for a 50bp cut, but with Friday’s news now affecting trade, expectations have ratcheted to 75bp or even an unprecedented 100bp cut. In short, US rates continue to decline and both fundamentals and sentiment show no mercy to dollar longs.
Visit our recently updated EUR/USD Currency Room for more resources dedicated to the US Dollar. – BS
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/strategy_pieces/tof/3-16-08_3-21-083.gif
Euro Keeps on Marching
Despite a sell off after the Fed’s infusion of $400 billion in liquidity, the Euro spent the majority of the week setting higher and higher all time record levels. The bullish sentiment was fueled by the continuous stream of dour U.S fundamental data, and the surprising evidence of the Eurozone economy’s resiliency. The region saw unexpected increases in industrial production, exports and business confidence, fueled by strong Asian demand. Furthering the ECB’s hawkish stance was an unexpected increase in CPI, which saw the headline and core reading increase on rising energy, food and labor costs. Then the Bear Sterns bailout on Friday led to the dollar breaking down and sending the Euro above 1.580
The Euro started to end the week declining on profit taking and intervention speculation, despite the typically bullish CPI numbers from Europe and the U.S. As dollar conversion levels continue to set multi period and all time highs against the major currencies, government officials and policy makers have started to voice concerns, and increased the chances of a coordinated central bank intervention. That was until the announcement of JP Morgan and the Fed coming to the rescue of Bear Sterns, whose customers started to make a run on the bank, and all bets were off after that. Investors started to fear the worse, and began wondering if there was a systemic problem in the U.S. banking industry.
The week may start off quiet as all eyes will be on Tuesday’s FOMC rate decision and subsequent commentary from Fed Chairman Bernanke. That is unless the Fed decides to get an early start on cutting rates, as they did this weekend cutting the discount rate a quater point. Many are now speculating that a 100 point cut is a certainty and more action will be needed to avoid a monumental break down of the credit markets. Other than that, the major event risk from the calendar will be on Friday, where PMI manufacturing and services are expected to signal that the European economy ismaintaining above the 50 boom/bust level and that its is weatheringthe affects of a strong Euro and U.S. slowdown. A Fed rate cut and the diminishing prospects of a ECB cut is fundamentally enough to believe that there remains more upside potential for the currency.
Visit our recently updated EUR/USD Currency Room for more resources dedicated to the Euro. – JR
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/strategy_pieces/tof/3-16-08_3-21-084.gif
1 Yen = 1 US Cent, Will Japan Intervene in Currency Markets?
The Japanese Yen surged to its highest levels in nearly 13 years, as widespread dollar weakness allowed the East Asian currency to breach the psychologically significant ¥100/dollar mark for the first time since 1995. Traders now asks themselves whether the Yen's dramatic appreciation will be enough to elicit a similarly dramatic response from Japanese government officials. Namely, Yen speculators wonder whether the Japanese Ministry of Finance will intervene in order to halt the Yen's advance. The last Ministry of Finance forex intervention occurred just four years ago with the USDJPY near its current levels, and as such, it is reasonable to fear similar action by the Japanese government through the short term. Yet some claim that there are many other mitigating factors to consider when thinking about a potential intervention. The question of whether to intervene remains the most critical factor in USDJPY direction—trumping all other short-term fundamental and technical analysis.
High-ranking Ministry of Finance officials have stated that the MoF does not stand to intervene at current market levels. Vice-Finance Minister Shinohara said earlier this week that current circumstances are different than those seen through past interventions in 2003 and 2004, but other top government officials have clearly expressed their displeasure with recent Yen strength. Given the Japanese economy's key dependence on export demand, an exceedingly strong exchange rate could quite easily affect domestic economic growth. A global backdrop of deceleration in international consumption may only heighten fears of a Japanese export-led economic slowdown, and it will be very important to watch ongoing developments in both the economy and exchange rates. At the end of the day, it is very difficult to know whether or not the Ministry of Finance will flood the market with Yen and send the USDJPY significantly higher, but USDJPY-bears should clearly remain on alert for any potential action from the ominously powerful MoF. For more on this critical topic, see our recent special report on Japanese forex intervention: http://www.dailyfx.com/story/topheadline/USDJPY_at_100__Is_that_1205443382549.html - DR
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/strategy_pieces/tof/3-16-08_3-21-087.gif
Pound Fails To Rally On Dollar Weakness, Credit A UK Concern As Well
The UK economic calendar was relatively full over the past week, but scheduled data would ultimately have less influence over the strength of the pound than fears of a financial market crash did. A few bold market headlines shook confidence in the health of global credit markets last week. Towards the beginning of the week, risk appetite was actually whetted by the Federal Reserve’s TSLF program that would injection an additional $200 billion into the economy. The confidence this announcement restored in yield demand drove GPBUSD through 2.02. However, things quickly turned for the worst from there. On Thursday, the media reported that major hedge fund Carlyle Capital would have all its assets seized (and potentially dumped on the market) after failing to meet a margin call. Far more worrisome though was the Fed’s emergency bailout of Bear Stearns. Should a major financial player collapse, lending could come to a halt. There are a few reasons this data would have such a distinct influence over price action. However, London’s title as the world’s financial capital, and expectations for the BoE to further lower its rate over the coming months provided the most amplification.
The economic calendar also had its way with the pound – but primarily in the beginning of the week before risk trends will started to pick up. The week opened with the upstream PPI inflation readings for February. Factory-gate price pressures failed to accelerated, but still matched the 16-year high 5.7 percent clip from January. From the economic side of monetary policy, the data was far more dovish. Factory activity through January unexpectedly cooled 0.1 percent while the leading indicators composite (used to forecast growth three to six months out) contracted for the third consecutive month, which was also the sixth drop in the past seven months. Further dimming an optimistic outlook for growth, the RICS house price balance dropped to -64.7 percent – the worst reading since the UK’s last recession in 1990.
In the week ahead, the economic docket will have to jostle for attention among broader event risk trends. The health of global financial markets will be of primary importance for pound traders. Beyond that, the Fed’s rate decision will have a dramatic influence on GBPUSD, but it will also have its impact on the pound alone as market participants look for guidance as to how the BoE handles monetary policy next month. From the a number of top market movers will lie in wait. Scheduled for release on the same day as the FOMC decision, headline UK inflation for February bolster rate watchers’ outlook for the MPC. The BoE minutes will give some insight into the group’s decision to hold rates at 5.25 percent two weeks ago. Finally, the rest of the week will give a wrap up on the consumer as jobless claims, net borrowing and retail sales will measure Brit’s contribution to growth in these difficult times. -JK
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/strategy_pieces/tof/3-16-08_3-21-088.gif
Swiss Franc Hits Parity With Dollar, But Not Because Of The SNB
The Swiss franc was the top mover (behind the Japanese yen) over the past week. Not only did the currency rally to a new high against the US dollar, but it also surpassed parity. Along with EURUSD’s push through 1.50 and USDJPY’s drop below 100, this is yet another historic milestone for the currency market. And, looking over the economic calendar for the past week, there were certainly fundamentals winds blowing over the Swissie; but the true driver for the currency’s record breaking run didn’t come with a scheduled release time. Risk aversion has had its way with the yield-sensitive currency pairs since the credit market began to see real trouble back in September. However, the Fed’s emergency loan to Bear Stearns brought the financial market crisis to a new level. The near collapse of one of the world’s largest investment banks sent a shock through financial markets as it revealed just how bad credit market conditions were. If the foundations of basic lending and borrowing are unstable, the carry trade is certainly not a safe haven for capital.
Though the broader risk trends playing out in the market were the primary driver for the Swiss franc’s price action last week, the economic docket still produced a few notable economic indicators that will have an impact on the fundamental health of the currency. Heading into the period, market participants were predicting the SNB rate decision would be the prime opportunity for volatility. Ultimately, the SNB didn’t break with the market’s forecasts for holding its benchmark lending rate at an average 2.75 percent. On the other hand, they did deliver notable changes to their outlook for inflation and growth. The problems in the global credit market and waning demand from the US have led the policy authority to downgrade their 2008 growth outlook from “about 2.0 percent” to 1.5 to 2.0 percent. At the same time, the 2008 inflation forecast was revised from 1.7 percent to 2.0 percent while the 2009 projection was stepped up from 1.4 to 1.5 percent. While the SNB is not likely to move without the ECB going first, this does sow the seeds for a possible hike down the line.
For the days ahead, though the economic calendar will fill out, risk sentiment will almost certainly play a greater role in defining price action. Another bailout or repercussions from Bear’s emergency lending could quickly revive volatility. Another threat to risk trends will be Tuesday’s FOMC rate decision. The Fed’s rate cuts are no longer merely aimed at helping out the US economy, but also at stabilizing the entire financial system. When there is a lull exogenous action, the economic calendar could fill in the gap with a number of notable market movers. January retail sales will measure consumer’s health while fourth quarter industrial production will gauge business activity through a high currency, rising input costs and fading foreign demand. The balance and upstream inflation reports for February will hit the wires back-to-back, though their impact on price action has historically been restrained.– JK
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/strategy_pieces/tof/3-16-08_3-21-089.gif
Canadian Dollar Remains Above Parity – What’s Next?
The Canadian dollar joined all major G10 counterparts in a virtually unrelenting onslaught against the US dollar, with the Loonie charging noticeably above parity against the Greenback for the third consecutive week of trading. Fresh economic developments for the world’s eighth-largest economy included a significantly stronger-than-expected Housing Starts result, while later International Merchandise Trade data likewise bolstered outlook for Canadian expansion. Indeed, the Loonie seems to be riding a wave of bullish economic data; the previous week’s stunning Employment Change report remains fresh in the minds of Canadian dollar bulls. Whether or not the economy’s bullish streak can continue is the key question rolling forward, however, with next week’s key Consumer Price Index report to almost-certainly drive substantial volatility across CAD pairs.
Short term direction in the Canadian dollar may very well depend on the results from Tuesday’s CPI data, with a later International Securities Transactions report to likewise garner currency trader interest. The former will be critical in solidifying interest rate expectations for the domestic economy—a key driver of medium term movements across all major currencies. Markets currently expect that the Bank of Canada will continue on its interest rate-cutting cycle through the medium term, and some analysts call for an aggressive 50 basis points in BoC rate cuts at the next announcement in April. Yet a jump in Core CPI could easily derail plans for substantial monetary policy accommodation; given a fixed inflation target of 2.0 percent, the central bank will certainly react to any troubling trends in domestic price pressures. Any indication that the bank will temporarily halt or slow its current cutting cycle could only boost the Loonie’s prospects against the progressively lower-yielding US dollar. To that effect, it will likewise be critical to watch for any surprises from the coming week’s US Federal Open Market Committee’s interest rate announcement. Given that the US and Canadian Dollars are the second and third-lowest yielding currencies of the G10, respectively, the interest rate differential between the two may be an especially decisive factor in determining short and medium term USDCAD direction. – DR
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/strategy_pieces/tof/3-16-08_3-21-0810.gif
Aussie Rally Targets 24-Year High As Gold Breaks $1000/oz
The Australian dollar came close to hitting the 24-year highs achieved on February 28 amidst a massive rally in gold to an all-time high of $1,009/oz. However, resistance at the 0.9450 level capped gains while a subsequent pullback in commodities on Friday afternoon weighed the AUD/USD down. Nevertheless, the fundamentals were generally in favor of Aussie strength as the labor market experienced its 16th straight month of job growth in February. Indeed, the net employment change proved to be stronger-than-expected at a whopping 36,700, leading the jobless rate to 4 percent, the lowest reading since 1974. The news only stoked concerns that rising wages and solid domestic spending will add to building price pressures, especially as the Reserve Bank of Australia raised rates to a 12-year high of 7.25 percent two weeks ago in order to combat inflation.
However, with the instability in the financial markets and tight credit conditions remaining a problematic issue globally, the RBA has little room for maneuver with monetary policy going forward. As a result, Australian economic data may not play as critical of a role in Aussie trade, though traders should still pay heed to event risk and commodity prices. This week, event risk will be very thin, with only the Westpac Leading Index and DEWR Skilled Vacancies scheduled to hit the wires. Neither release tends to be very market-moving, so the status of risk aversion and demand for carry trades may be a better gauge of directionality. According to Technical Strategist Jamie Saettele, the AUD/USD pair may be in “wave 5 within the 5 wave bull cycle from .8512 is underway towards a new high (above .9496).Near term, expect price to remain above .9327.If .9327 gives way though, look for support near .9285” (see Jamie’s full Daily Technical Report for more). – TB
Visit our recently updated Australian Dollar Currency Room for specific resources geared towards the Aussie.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/strategy_pieces/tof/3-16-08_3-21-0811.gif
Kiwi Benefits From Commodity Binge, But A Turn Lower May Be Near
Similar to the other main commodity currencies, the New Zealand dollar benefited from hot oil and gold prices over the last week, as the NZD/USD pair tested the 26-year highs near 0.8200 once again on Friday. The move came after New Zealand manufacturing sales gained 8.3 percent in Q4 as production of meat and dairy products surged. This was the sharpest increase since record-keeping began 15 years and was led by a 26 percent jump in meat and dairy output. Excluding inflation, sales rose a more tepid 3.4 percent, highlighting just how strong commodity prices have been in recent months. Meanwhile, retail sales rose exactly in line with expectations at a 0.3 percent pace, but with interest rates in New Zealand already at a record high of 8.25 percent, there is very little chance that the Reserve Bank of New Zealand would consider tightening policy further. Indeed, given the global credit crunch and instability in the financial markets, any sort of rate hike could do more harm than good in the New Zealand economy.
EUR/USDResistance Reached?
The EURUSD has moved along a virtually vertical trajectory since breaking the triple top at around the 1.4870-1.4900 area. Anyone trying to pick a top on the buoyant pair has been painfully disappointed. That said, no rally is indefinite and a retracement will occur.
Today’s daily chart is shaping to form an Inverted Hammer after the pair’s attempted run above 1.5800 lost steam. A long rally can be expected to have an equally profound reversal. If the top below 1.5800 is confirmed with a bearish candle tomorrow, a short trade can yield over 500 pips in profit. On balance, the long-term outlook for EURUSD is definitively bullish, so a tight stop should be employed since we are trading counter-trend.
EUR/USD Trading Strategy
1. If the Inverted Hammer formation is confirmed with a red candle, short EURUSD below 1.5860.
2.Set stop above the Hammer wick’s high at 15924.
3. Set profit target above 1.5320, giving an excellent risk-reward ratio (risking 64 pips to gain 540).
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/Candlesticks/Candlestick.03.17.08.img2.gif
GBP/USD
Found support?
Having broken a significant resistance level at 1.9960, the GBPUSD mounted a bullish run back above the 2.00 level. The pair then ran into resistance at 2.0331, falling for three consecutive days to form the Three Black Crows formation.
The current pull-back now finds itself testing the upward sloping trend-line at 2.0040, with resistance-turned-support at 1.9960 firmly in place below that. Our immediate posture is to remain flat as the pair settles towards support with a medium-term bullish view from there.
GBP/USD Strategy
1. Long GBPUSD above 2.0040 following a confirmation with a bullish candle at support.
2. Rather than setting a limit order to take profit at a hard target, we will wait to see what happens when the pair tests resistance at 2.0331 and hold the trade open in the event of a breach.
3. Set stop-loss just below 1.9900 to limit risk should support at 1.9963 give in. This gives good risk-reward parameters, risking 150 or so pips to potentially gain 290.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/Candlesticks/Candlestick.03.17.08.img3.gif
USD/JPY
Freefall!
USDJPY broke below medium term support above 103.00 and the long-term support at 101.69. USDJPY has not breached this level since 1994. Previous tests occurred in 1999 and 2004.
The pair is now in a virtual freefall eyeing the all time low around 80. However, as we mentioned for the EURUSD above, no rally is indefinite and a retracement of current yen strength will occur. The current price action does not signal a retracement to be imminent, but a sell at current levels with the pair a bit over-extended to the downside seems aggressive.
Though the bias is decidedly to the downside, we will wait for a better entry point to present itself.
USD/JPY Strategy
We remain neutral on the USD/JPY at the moment. The pair’s current positioning does not yield a good entry point.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/Candlesticks/Candlestick.03.17.08.img4.gif
USD/CAD
Coiling up
Having regained some territory after the dramatic spike low to 0.9000, the USDCAD now looks poised to dive back down again. The pair is trading in a Flag continuation pattern, suggesting the bias remains to the downside. The candles for the past several weeks click close to support, suggesting a break is brewing.
While there is no confirmation at the moment, the bias seems to the downside. If this scenario materializes, we will be looking to short USDCAD on a weekly close below 0.9770, targeting the low at 0.9430.
USD/CAD Strategy
We remain flat as we wait for confirmation to enter short.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/Candlesticks/Candlestick.03.17.08.img8.gif
AUD/USD
Ready for another run?
The past two weeks have seen the AUDUSD test at all-time high at 0.9490, only to fall back sharply some 400 pips. The decline has now stalled a bit at the upward-sloping medium term support.
With a yield gap of 4.25%, our long term bias for the AUDUSD is bullish. Should the pair fail to close below the trend line at 0.9230, we will look for a bullish candle to signal a long entry. If that support gives way, the next hurdle is a multiple resistance-turned-support level at 0.9104.
We will wait for the current candle to close and monitor the next one to confirm a bottom is in place, then go long once an entry point presents itself. Our initial profit target will be the high at 0.9500. If the decline stops at the trend-line and the AUD rally resumes, our stop-loss will be below 0.9210. If the pair breaks past the trend line, we will look for an entry above 0.9104 with a stop-loss near 0.9010.
AUD/USD Strategy
Our bias is bullish, but we remain on the sidelines for the moment as an entry point presents itself.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/Candlesticks/Candlestick.03.17.08.img5.gif
NZD/USD
Walking the line
Having tested the high of 0.8200 again last week, the NZDUSD has taken a step back towards the trend-line support at 0.7940. This now closely coincides with multiple resistance-turned-support level near 0.7934 (see chart below).
With the long term trend still looking bullish, this retracement presents a buying opportunity above support aiming for a bounce to test 0.8200 once again.
On balance, the monthly chart suggests a long-term resistance level in place since 2003 coinciding with the 0.8200 level. The March candle currently looks to be flirting with a Doji or Spinning Top body, suggesting the possibility of a prolonged reversal. However, we must be cautious not to make assumptions before the candle closes and confirmation is in place. For the time being, our bias remains long NZDUSD.
NZD/USD Strategy
1. Buy NZDUSD above 0.7934 targeting the February high of 0.8200.
2. Place stop loss below the trend line near 0.7850, thereby risking about 70 pips to gain over 260.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/Candlesticks/Candlestick.03.17.08.img6.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/Candlesticks/Candlestick.03.17.08.img7.gif
Written by John Kicklighter, Currency Analyst and Kathy Lien, Chief Currency Strategist
For the past two weeks, risk aversion and fears of a global downturn in economic expansion have led the Japanese yen to rally against most of its major counterparts. However, despite all of the impressive yen-cross moves, the USDJPY is now drawing the market’s sole focus. Since the open of Thursday’s Asian session, the pair has plunged to its lowest level in over 12 years and at the same time tested the closely watched 100 level. While this level has technical relevance as a psychological number, it has far deeper fundamental roots – roots that may define the direction of the Japanese yen at this crossroad. Testing this level has led to a collective recollection of the past when the Bank of Japan intervened in the currency market to stop the currency’s rise. With USD/JPY testing decade lows, will the central bank step in again and how will the market respond?
The Bank of Japan: A History of Intervention
Before delving into the arguments for and against the Bank of Japan’s intervention in the currency markets, it is important to understand why both analysts and market participants are concerned about a possible intercession this time around. Looking at the chart below, we can see that the Japanese central bank is no stranger when it comes to manipulating the currency market. In the past 10 years, the BoJ has entered the market on three very notable occasions. The earliest effort came back in 1998 after USDJPY rallied over 6,700 points (and nearly doubling 1995’s exchange rate) to a high that lost momentum just before reaching 150. The next time the group stepped into the market was in 2000 around 100. The importance of this level was substantiated when in 2004 the central bank once again entered the market to shore up price action above 100. Whether this is considered a level of equilibrium for the largely export market, or merely a coincidence, it has certainly caught the market’s attention.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top1_3-13.gif
Why Intervention is Inevitable:
There are a number of reasons why the Bank of Japan or specifically the Ministry of Finance could intervene in the Japanese Yen other than the fact that it has hit 100, which has always been a point of contention for policy makers:
1. Japanese Corporations are Losing Money:
The most solid argument for the official money market activity is to secure the economy’s place in the global market place. Japan is a major export nation and ships most of its goods to the US and other Asian trade partners. With the yen appreciating consistently against the US dollar, the currency of its largest trade partner, the health of the economy is at stake. According to the recent Tankan survey showed that most Japanese corporations forecast the value of USDJPY in 2008 to be around 113.00.
At 100, their hedges are deep in the red. This is an especially concerning point for policy makers in 2008 as the US is flirting with a possible recession and the Japanese economy is looking at little support from domestic consumption as both consumer confidence and planned business investment are at 5-year lows. Should corporate profitability plummet at this economically delicate time, the Japanese economy could find itself in worse shape than the US.
2. Lowering Interest Rates Not an Option:
If the Japanese government lets the Japanese Yen continue to rise, they will quickly run out of options to stabilize growth.
For the BoJ, lowering rates in an attempt to halt the yen’s advance and correcting credit markets – like the Fed – is unreasonable. Since the benchmark Japanese lending rate is only 0.5 percent, they have limited downside potential for lower rates. What’s more, the market would know the BoJ couldn’t lower rates deeply enough to influence the rally. So, from this standpoint, it would seem the central bank has little choice but to intervene if they don’t want to leave Japan’s fate to the whims of the market.
3. Speculative Position at an Extreme:
If the Japanese government wanted to intervene, no time would be better than the present because positioning in the Japanese Yen is at an extreme, giving them the most bang for their buck. Yen long positions are at the highest levels since Feb 2004, right before the last BoJ intervention. An intervention now would trigger stops, exacerbating the USD/JPY’s rise.
Why the Japanese Will Wait
1. Leadership Vacuum:
When it comes to the health of the economy and the level of the Japanese yen, the Bank of Japan has a duty to do what it can to promote stability. However, bureaucracy can often be a greater force than one’s duty. For those that believe the currency’s advance requires the Bank of Japan’s hand, the recent political feud over the central bank could not have come at a worst time. A great divide has developed within Parliament over who will succeed current Governor Toshihiko Fukui and his two deputies when they steps down next week on the 19th. The lower house – held by the ruling party – has already passed nominees for all three positions, with Toshiro Muto looking to take the Governorship. However, the opposition held upper parliament has vetoed Muto and one of the deputies – claiming their attachment to the Ministry of Finance would jeopardize the central bank’s independence. So, while lawmakers try to work out this bind, there is likely to be a political freeze on any monetary policy that could polarize the parliament. If there is no decision made on a replacement by next Wednesday, a deputy or bank member will have to stand into the top spot. And, the likelihood of a fill-in making any dramatic decisions is slim.
2. MoF Officials Have Already Denied Need for Intervention: Outside the Bank of Japan’s bind, there have been guarantees made by high ranking officials to assure that there will be no intervention this time around. Vice Finance Minister Shinohara said earlier this week that the current circumstances are different from when they intervened in 2003 and 2004, which is why the current USD/JPY move may not be stressing them out.
3. Japan is Calling for More Chinese Revaluation:
Another reason officials are unlikely to intervene in the market, is Japan’s ongoing encouragement for China to allow its currency appreciate under market natural market forces. The Chinese Yuan has long been under the express control of the government. Only recently have they loosened the currency peg under global political pressure and oppressive levels of inflation; but China is restraining the yuan’s appreciation. It is in Japan’s best interest for the Chinese currency to appreciate as this improves their competitiveness with cheap goods shipped out of the Asian giant and Japanese exports to China will yield a greater return. However, should Japan intervene in the currency market, it may be labeled manipulation by the still cautious Chinese monetary policy authority and hamper a shift towards more liberal exchange controls.
Where will the Yen go?
While it is unclear whether the Bank of Japan will intervene in the market or not, the outcome for the both scenarios is rather clear. Should the central bank hold the sanctity of the 100 level, the yen could quickly tumble, allowing for a recovery in USD/JPY. A strong rebound could easily build momentum from a captivated speculative market which is ready for a sharp turn on what many would consider strong, psychological support. Positioning in the market certainly confirms this outlook. The Commitment of Traders Report has reported a historical high in speculative yen long positions, and reversals are usually seen at these extremes. On the other hand, if the policy authority chooses to ignore the yen’s advance, risk aversion and carry trade unwind could easily carry though the otherwise notable level. Sentiment also supports follow through. FXCM’s Speculative Sentiment Index jumped to 2.46 with nearly 71 percent of retail traders holding long positions. Retail traders are often on the wrong side of the trade. So, no matter the outcome, volatility should be expected.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top2_3-13.gif
The USDJPY broke traded below 100 today for the first time since October 1995.
More importantly, the pair broke below waves b and d of the long term triangle.
This supports our long term call for price to drop below the 1995 low of 81.12.
However, we do expect a rally near term.
There are 9 waves down from 103.58 (which we are treating as the end of wave 4 on
Trading the News: US Consumer Price IndexWhat’s Expected
Time of release: 03/14/2008 12:30 GMT, 08:30 EST
Primary Pair Impact : EURUSD
Expected: 4.3%
Previous: 4.3%
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/TTN/03.13.2008.img1.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/TTN/03.13.2008.img2.gif
How To Trade This Event Risk
There is very little support for a dollar bullish outlook under current market conditions. However, there may be reason to be less dollar bearish; and even slight improvements in the forecast for a currency at record lows can lead to a significant rebound. For the battered greenback, the top fundamental concern is the outlook for monetary policy. The Federal Reserve has cut its benchmark lending rate 225 basis points since it began its dovish regime in September. This has clearly had a severe impact on sentiment as the dollar has been pushed further and further into record lows; and few trends could keep momentum going at such extreme levels. From the monetary policy statements that accompany each rate decision, public addresses by Fed members and Chairman Bernanke’s testimony to congress, we know that the central bank has shifted its focus to faltering economic activity and a struggling financial markets. This has pushed stifling inflation pressures to the background – even though headline and core pressures are well above the group’s target. However, conditions have changed in the past few weeks. Though the outlook for an impending economic contraction has intensified; the Fed may have scope to take a more neutral policy stance. Not only have previous cuts not filtered through the market, but the policy authority recently announced a massive liquidity injection into the credit market, with mortgage-backed securities allowed as collateral. This was an effort aimed specifically at loosening credit markets and may be a replacement for further, deep rate cuts. However, if inflation cools through February, there will be little reason for the Fed not to double up on its efforts and cut another 75bp to try and jumpstart the economy.
Considering how low the US dollar is, a sharp rebound is certainly a strong possibility. However, fundamentals would need to support such a move. For a market that has priced in steady and large rate cuts for the foreseeable future, the catalyst for a sharp rebound from the dollar would have to come from doubt that the Fed will continue as consistently as previously expected. The seeds of such doubt have already been sown with the TSLF, but inflation will need to confirm it. We would consider a 4.6% headline CPI read and 2.7% core CPI read as fulfilling the hawkish push. With a confirmed, positive fundamental release we will look for a five-minute red candle to confirm entry on two lots of EURUSD. Our initial stop will be set at the nearby swing low (or reasonable distance) and this risk will determine our first target. Our second target will be based on discretion (with a mind to major resistance in the vicinity) and to preserve profit we will move the stop on the second lot to break even when the first half of the trade reaches its target.
On the other hand, with the economy inching closer to a recession and credit conditions worsening, a natural drop in inflation could open the Fed to more cuts and the dollar to further losses. We will follow the same strategy for a short as the long above, just in reverse.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/TTN/03.13.2008.img3.gif
Hedging Strategy of the WeekCurrency Pair: AUDUSD
Long Term Bias:Bullish
Long Term Position:Holding Long (from 1/22 swing low at 0.8510)
Short Term Bias:Bearish
Short Term Position: Short Against 0.9335 (falling trendline), Target Rising Trendline (0.9165 for 03/12)
While both technical and fundamental considerations point to AUDUSD’s ascent to 1.00, the market may be in for an extended period of congestion before the Aussie bulls reclaim direction. For those that are keeping with the long-term momentum of the dominate trend and already have an established long position or are looking for a good entry on bullish convictions; actively hedging AUDUSD through its recent consolidation can reduce drawdowns and boost profits. For those bulls already in the market, a short (hedging) position can be taken around 0.9335 to neutralize a short-term reversal in the pair’s closing wedge. A target of 0.92 (or modestly above the rising trend line) will cancel out the pullback; and a stop around 0.94 will leave the long side of the trade to take profit on an upside breakout.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/Hedge/2008.03.12.img1.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/Hedge/2008.03.12.img2.gif
When should I use the hedging feature?
Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.
The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.
EUR/USDStrategy: Bullish against 1.5200, Targeting 1.5555
Another week has passed and another objective has been met. Since overtaking 1.50, momentum behind the euro’s rally has certainly accelerated. This past Thursday, my target of 1.5325, at the lesser followed 138.2% Fibonacci extension, was met and surpassed. After EURUSD had overtaken this target with such force, I moved my bullish target out to the next major level – the 161.8% extension. This level is calculated from the same 10/09 to 11/23 rally that opened the pair’s four month-long wedge that fell with the break of 1.50. Set at 1.5555, this new target could easily be met with another thrust to the upside; but the presence of the 161.8% extension of the 11/23 to 12/20 downswing at 1.5425 and the psychological significance of 1.55 have raised caution. To secure profit and reduce risk, I have moved my bullish stop up to 1.52.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib2_3-11.gif
GBP/USD
Strategy: Bearish against 2.0035, Targeting 2.0465
The pound finally decided a direction for GBPUSD when the currency pushed through its broad range this past week and stumbled quickly into Fibonacci congestion. I had chosen last week to play the range rather than position for the breakout trade, but the my stop around the 38.2% retracement of the 11/09 to 1/22 downdraft was relatively close and kept me from greater losses (range trades aren’t only appealing for their greater probabilities, but also for their use in defining close stops and reasonable targets). With this upside push, the medium-term outlook has donned a bullish garb and so my next target will be set at the top of the pair’s larger-term fib congestion at 2.0465. This is against another modest stop of 1.9970 – the top of the January/February range.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib3_3-11.gif
USD/JPY
Strategy: Bearish against 104.20, Targeting 100.00
Another, momentous bear run has pulled USDJPY over 600 points lower in just two weeks. In the most recent leg of this downdraft, the yen has made more limited progress by rising only 200 points against its US counterpart. Further declines seems to be hampered by a Fib confluence around 100.25. Both a lesser 138.2% Fibonacci extension of the major 12/27 to 1/23 bear wave and a more technically significant 200% move from the trend channel between 1/23 to 2/14 are sharing this level. Since this support level happens to also fall in line with the major USDJPY swing low back in 1999, my bearish outlook has cooled considerably. I will maintain my 100 target, but it will be necessary to reduce risk due to the high probability of a considerable retracement.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib4_3-11.gif
USD/CHF
Strategy: Bearish against 1.0475, Targeting 1.0000
Much like the Japanese yen, the Swiss franc has enjoyed an incredible rally against the battered US dollar. However, unlike the yen, the franc has few reliable targets for its steady advance. USDCHF is already pressing new record lows, and there are few clear levels for market participants to pull major Fibonacci extensions from. My initial target of 1.0200 was last week, and selecting a new target is growing increasingly difficult. There are a number of fib extensions some distance below, but the market is likely to respond more readily to parity (1.0000), so that shall be my next bullish objective. On the other hand, the 700 point plus decline over the past two weeks raises the risk of a potential retracement. To compensate for this risk, I have moved my stop up to 1.0575 – though a breach of this level wouldn’t necessarily turn me into a long-term bull.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib5_3-11.gif
USD/CAD
Strategy: Flat, waiting for confirmed move below 0.9550 or the bull trend to retake 1.0200
The USDCAD’s stubbornness recalls to similar conditions years ago when this pair would completely ignore the trends that would overtake the other majors. Once again, the loonie-based pair is the only dollar-denominated major that has not joined the anti-dollar wholeheartedly. While we don’t need great trends to apply Fibonacci profitable, we do need a broad enough range to present reasonable risk/reward. This is not the case with USDCAD, which has been relegated by a volatile market to a choppy, rising wedge below 1.00. I will keep to the sidelines until the market presents us with more directionality or at least a broader range.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib6_3-11.gif
AUD/USD
Strategy: Bullish against 0.9005, Targeting 1.0000
The AUDUSD pullback that began last week has intensified. From the multi-decade high set on February 28th, spot has fallen back 350 points. This retracement has brought AUDUSD within stone’s throw of our first major Fibonacci support level: the 38.2% retracement of the massive 1000-point rally from 1/22 to 2/28. However, I am skeptical that this level alone would hold back a deeper pullback. To account for the steady downtrend developing on the shorter time frame charts, I have eased the stop on my bullish outlook back below the 50% fib of the aforementioned bull wave. Should Aussie buying reemerge above these Fib levels, I will be more confident in my ultimate objective for AUDUSD to reach parity.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib7_3-11.gif
NZD/USD
Strategy: Bullish against 0.7800, Targeting 0.8200
Considering the NZDUSD’s sharp, short-term reversal Tuesday morning, the initial stop on our bullish outlook proved prophetic.
However, for this pair, the stops steadfastness is likely more chance than it was cold hard objectivism. Following in the footsteps of its high-yielding complement the Aussie dollar, the kiwi has been steeped into a deeper correction. Despite this pull back though, my bullish outlook is still intact and will remain that way until spot retraces half of its 800 point rally through January and February. Should NZDUSD regain its footing, my first target will be for a retest of the post-float record high at 0.82. Beyond that, I will need to turn to Fib extensions for reliable projections.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib8_3-11.gif
Update: Forex market intervention remains a hot issue this week, as the risk of physical intervention by the Bank of Japan has jumped significantly while European Central Bank President Jean-Claude Trichet engaged in some jaw-boning of the euro.
Japanese yen – The risk of physical intervention by the Bank of Japan has increased significantly as the latest Commitment of Traders report shows that positioning is growing extreme. Indeed, speculative long positions on yen futures are at their highest level since February 2004, a month before the BoJ last intervened. As a result, traders should beware of holding on to USDJPY short positions and maintain tight stops, as a sharp turn higher could occur at any time.
Euro – The euro pulled back on Monday morning as ECB Jean-Claude Trichet noted that the Bank is "concerned about excessive exchange-rate moves" while he sees an "ongoing, very significant market correction." The rhetoric comes on the tails of a massive euro rally that propelled the currency to record highs of 1.5459 on Friday. As we mention below, verbal intervention by European officials is relatively common, and the impact of Trichet's comments may be limited as he stopped short of calling the moves "brutal."
Originally published March 7, 2008:
The broad weakness of the US dollar has hit the forex markets hard recently. Indeed, over the past few weeks, the currency has plummeted amidst dovish rhetoric from Fed Chairman Ben Bernanke and signs that the US is already in a recession. The flip side of the trade is just as important: the Euro is hitting new highs almost daily, the Japanese yen is nearing 9-year highs, and the New Zealand dollar has broken to 26-year highs. The rapid appreciation of these currencies could prove especially worrying for government and central bank officials, as the Euro-zone, Japan, and New Zealand all depend on exports for economic growth, especially as consumers tighten their purse strings and spending fades. As a result, it is worth questioning if the European Central Bank, the Bank of Japan, and the Reserve Bank of Zealand will make a coordinated effort to stave off an all-out crash of the US dollar in an attempt to weigh down their own currencies.
These Banks are no strangers to intervening in the currency markets. The last time a major coordinated effort was made to intervene was in September 2000, when the Fed, BOE, BoJ, and BoC joined forces with the ECB to support a beleaguered euro. Meanwhile, the RBNZ intervened just last year to cap gains in the New Zealand dollar. Will we see a repeat in 2008?
Bank of Japan – Most Likely to Intervene Independently
Of the G-10 countries, Japanese policymakers are the most likely to get their hands dirty and intervene in the currency markets when the Japanese yen’s price movements are too volatile and extreme for their liking. However, the Bank of Japan and Ministry of Finance have been a bit more lenient in recent years, as the last official intervention was conducted in March 2004. Nevertheless, policymakers have plenty of reason to be concerned about the Japanese yen’s most recent surge, as the USDJPY pair has recently tumbled to am 8-year low of 101.40. The strength of the currency is hurting the profit margins of major Japanese corporations, as the most recent Tankan survey showed that most Japanese corporations forecast the value of USDJPY in 2008 to be around 113.00. With the pair now rapidly approaching the 100 level, those hedges are deep in the red. Furthermore, Japanese Economy Minister Hiroko Ota noted that the approximate break-even point for companies is at the 106.60 level, and firms like Toyota, Yamaha Motor Co., and Nippon Steel have all reported disappointing earnings as a result. Unsurprisingly, the shares of exporters have taken a hit and are a major reason why the Nikkei Stock Average has plummeted declined 6 percent over the past five days, the biggest loss since the week ended August 17.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top1_3-7.gif
Given the virtual standstill in economic activity, the growing squeeze on Japan’s export sector, and the sharp drop in the Nikkei, it is not unreasonable to wonder if the Bank of Japan may consider intervening in the currency market to help prop up USD/JPY above the 100 level – a point not seen since December 1995 – in order to assure that the country’s exporters are not crippled by uncompetitive exchange rates.
While the effectiveness of currency intervention as a policy tool has been an ongoing debate within the financial markets and academia for years, there is little argument that at least in the short term, it can be brutally effective. Amongst the G-3 central banks, the Bank of Japan is by far the most active practitioner of this policy. Furthermore, the Bank of Japan prefers to optimize the effectiveness of its intervention by fading speculative extremes, meaning that the currency pair can rise by hundreds of points within minutes. However, the most recent COT data shows that yen positioning is not extreme quite yet, suggesting the currency may have more room to gain. Either way, FX traders who are short USD/JPY need to be increasingly careful and stringent with their stops as the currency approaches 100.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top2_3-7.gif
European Central Bank – With Inflation Running Rampant, Intervention May Do More Harm Than Good
Although selling euros in the cash market would certainly create a near term correction in the EURUSD, it is unlikely to be a viable medium term solution. When the ECB intervened back in 2000, fundamentals supported a stronger EURUSD, as the pair traded near 0.86. While the intervention was initially a losing proposition (the pair fell to 0.8225 within a month), the move was eventually effective in creating a bottom in the currency pair. This time around, the US economy is markedly worse off than that of the Euro-zone, which does not necessarily warrant a weaker euro. Nevertheless, European officials – who frequently rely on verbal intervention attempts – have recently signaled discomfort with the euro’s ascent as companies that export heavily to the US are suffering. Euro Group Chairman Jean-Claude Juncker said just a few days ago that, “for the first time in our agreed terms of reference we (Euro-zone finance ministers and ECB President Trichet) say that in the present circumstances we are concerned about excessive exchange rate moves. We have never previously said that we were concerned on the basis of current circumstances. We don't think the recent moves are reflecting economic fundamentals.”
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top3_3-7.gif
The comments were followed up by a dour outlook by Martin Winterkorn, the chief executive of Volkswagen, who said that the company will likely continue to lose money in the US, which is the world’s largest car market, despite numerous attempts to become more competitive. Mr. Winterkorn told the Financial Times, “At this dollar level, break-even would be difficult.” However, the rhetoric has done little to cool the euro rally, and to a certain degree, the currency’s gains could not have come at a better time.
Indeed, inflation in the Euro-zone is accelerating at a rapid 3.2 percent annualized pace, the fastest rate of growth since the euro was introduced in 1999. The combination of record energy and food prices has led broad consumer costs to rocket, but consider this: if the euro were to weaken, the cost of imported goods like oil would rise even faster. As a result, the Euro-zone is actually benefiting from the currency’s appreciation given the current inflationary environment. These circumstances underpin the ECB’s focus on price stability, as the Bank left rates steady at 4.00 percent in March and followed the decision up with hawkish commentary from ECB President Trichet.
Reserve Bank of New Zealand – After A Failed Attempt in June 2007, Will They Try Again?
During June 2007, just a week after raising interest rates to 8 percent, the Reserve Bank of New Zealand did the unexpected; they attempted to artificially weaken the New Zealand dollar by selling it outright in the foreign exchange market for the first time since the currency was floated back in 1985. Not only was the impact of intervention completely inconsistent with the impact of an interest rate hike, but the action didn’t work. Indeed, at that point, the New Zealand dollar had increased 26 percent against the US dollar to a high of 0.7637. While the currency initially backed down, it ultimately rallied as high as 0.8107 before posting a more substantial decline. While the RBNZ did not specifically say that they intervened at this point, a net selling of nearly NZ$1.5 billion by the central bank occurred during the month, suggesting they had something to do with the initial decline.
As an export dependent country, the general fear is that the strength of the kiwi would take a big bite out of exports. Both RBNZ Governor Bollard and Finance Minister Cullen had repeatedly warned that the currency is extremely overvalued.Yet despite this strength, the RBNZ had no choice but to raise interest rates four times over the course of 2007 to a current record high of 8.25 percent as inflation growth spiraled out of control. The unprecedented move indicates that this was a very serious step for the central bank and not one that to been taken lightly. However, the RBNZ has not intervened since mid-2007, despite the New Zealand dollar’s climb to a fresh 26-year high of 0.8213. Similar to the Euro-zone, the New Zealand economy is benefiting from the inflation-fighting abilities of a strong kiwi, as the appreciation helps to quell import price growth. Furthermore, when Trichet last used the words “brutal” to describe the currency’s move in 2004, the EUR/USD rallied 13 percent in 2 months. Since the beginning of this year, the EUR/USD is only up 6 percent which explains why the central bank is not stressed about the latest moves. However, if the euro ascent is still taking place when inflationary pressures start to ease, the ECB will likely shift to a more dovish stance and consider cutting rates rather quickly, which would subsequently send the currency plummeting without having to utilize foreign currency reserves and physically intervening in the markets.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top4_3-7.gif
Is Intervention Worth the Effort?
As we noted above, the Bank of Japan, European Central Bank, and the Reserve Bank of New Zealand have all engaged in FX intervention with varying degrees of success in the past. With over $1 trillion in official foreign reserves, the BoJ is by far the best equipped to attempt to put a cap on Japanese yen gains as the appreciation seriously impairs the profit margins of Japanese firms. The ECB and the RBNZ, on the other hand, have something to gain from their currency’s appreciation, despite the negative impact it has on exports, as it shields their economies from more severe import price inflation. As a result, the noted central banks may not find it to be in their best interest to make a coordinated effort to fight the market’s clear US dollar bearish tone and intervene physically in the cash markets quite yet.
The broad weakness of the US dollar has hit the forex markets hard recently. Indeed, over the past few weeks, the currency has plummeted amidst dovish rhetoric from Fed Chairman Ben Bernanke and signs that the US is already in a recession. The flip side of the trade is just as important: the Euro is hitting new highs almost daily, the Japanese yen is nearing 9-year highs, and the New Zealand dollar has broken to 26-year highs. The rapid appreciation of these currencies could prove especially worrying for government and central bank officials, as the Euro-zone, Japan, and New Zealand all depend on exports for economic growth, especially as consumers tighten their purse strings and spending fades. As a result, it is worth questioning if the European Central Bank, the Bank of Japan, and the Reserve Bank of Zealand will make a coordinated effort to stave off an all-out crash of the US dollar in an attempt to weigh down their own currencies.
These Banks are no strangers to intervening in the currency markets. The last time a major coordinated effort was made to intervene was in September 2000, when the Fed, BOE, BoJ, and BoC joined forces with the ECB to support a beleaguered euro. Meanwhile, the RBNZ intervened just last year to cap gains in the New Zealand dollar. Will we see a repeat in 2008?
Bank of Japan – Most Likely to Intervene Independently
Of the G-10 countries, Japanese policymakers are the most likely to get their hands dirty and intervene in the currency markets when the Japanese yen’s price movements are too volatile and extreme for their liking. However, the Bank of Japan and Ministry of Finance have been a bit more lenient in recent years, as the last official intervention was conducted in March 2004. Nevertheless, policymakers have plenty of reason to be concerned about the Japanese yen’s most recent surge, as the USDJPY pair has recently tumbled to am 8-year low of 101.40. The strength of the currency is hurting the profit margins of major Japanese corporations, as the most recent Tankan survey showed that most Japanese corporations forecast the value of USDJPY in 2008 to be around 113.00.
With the pair now rapidly approaching the 100 level, those hedges are deep in the red. Furthermore, Japanese Economy Minister Hiroko Ota noted that the approximate break-even point for companies is at the 106.60 level, and firms like Toyota, Yamaha Motor Co., and Nippon Steel have all reported disappointing earnings as a result. Unsurprisingly, the shares of exporters have taken a hit and are a major reason why the Nikkei Stock Average has plummeted declined 6 percent over the past five days, the biggest loss since the week ended August 17.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top1_3-7.gif
Given the virtual standstill in economic activity, the growing squeeze on Japan’s export sector, and the sharp drop in the Nikkei, it is not unreasonable to wonder if the Bank of Japan may consider intervening in the currency market to help prop up USD/JPY above the 100 level – a point not seen since December 1995 – in order to assure that the country’s exporters are not crippled by uncompetitive exchange rates.
While the effectiveness of currency intervention as a policy tool has been an ongoing debate within the financial markets and academia for years, there is little argument that at least in the short term, it can be brutally effective. Amongst the G-3 central banks, the Bank of Japan is by far the most active practitioner of this policy. Furthermore, the Bank of Japan prefers to optimize the effectiveness of its intervention by fading speculative extremes, meaning that the currency pair can rise by hundreds of points within minutes. However, the most recent COT data shows that yen positioning is not extreme quite yet, suggesting the currency may have more room to gain.
Either way, FX traders who are short USD/JPY need to be increasingly careful and stringent with their stops as the currency approaches 100.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top2_3-7.gif
European Central Bank – With Inflation Running Rampant, Intervention May Do More Harm Than Good
Although selling euros in the cash market would certainly create a near term correction in the EURUSD, it is unlikely to be a viable medium term solution.
When the ECB intervened back in 2000, fundamentals supported a stronger EURUSD, as the pair traded near 0.86. While the intervention was initially a losing proposition (the pair fell to 0.8225 within a month), the move was eventually effective in creating a bottom in the currency pair. This time around, the US economy is markedly worse off than that of the Euro-zone, which does not necessarily warrant a weaker euro. Nevertheless, European officials – who frequently rely on verbal intervention attempts – have recently signaled discomfort with the euro’s ascent as companies that export heavily to the US are suffering. Euro Group Chairman Jean-Claude Juncker said just a few days ago that, “for the first time in our agreed terms of reference we (Euro-zone finance ministers and ECB President Trichet) say that in the present circumstances we are concerned about excessive exchange rate moves. We have never previously said that we were concerned on the basis of current circumstances. We don't think the recent moves are reflecting economic fundamentals.”
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top3_3-7.gif
The comments were followed up by a dour outlook by Martin Winterkorn, the chief executive of Volkswagen, who said that the company will likely continue to lose money in the US, which is the world’s largest car market, despite numerous attempts to become more competitive. Mr. Winterkorn told the Financial Times, “At this dollar level, break-even would be difficult.” However, the rhetoric has done little to cool the euro rally, and to a certain degree, the currency’s gains could not have come at a better time.
Indeed, inflation in the Euro-zone is accelerating at a rapid 3.2 percent annualized pace, the fastest rate of growth since the euro was introduced in 1999. The combination of record energy and food prices has led broad consumer costs to rocket, but consider this: if the euro were to weaken, the cost of imported goods like oil would rise even faster. As a result, the Euro-zone is actually benefiting from the currency’s appreciation given the current inflationary environment. These circumstances underpin the ECB’s focus on price stability, as the Bank left rates steady at 4.00 percent in March and followed the decision up with hawkish commentary from ECB President Trichet.
Reserve Bank of New Zealand – After A Failed Attempt in June 2007, Will They Try Again?
During June 2007, just a week after raising interest rates to 8 percent, the Reserve Bank of New Zealand did the unexpected; they attempted to artificially weaken the New Zealand dollar by selling it outright in the foreign exchange market for the first time since the currency was floated back in 1985. Not only was the impact of intervention completely inconsistent with the impact of an interest rate hike, but the action didn’t work. Indeed, at that point, the New Zealand dollar had increased 26 percent against the US dollar to a high of 0.7637. While the currency initially backed down, it ultimately rallied as high as 0.8107 before posting a more substantial decline. While the RBNZ did not specifically say that they intervened at this point, a net selling of nearly NZ$1.5 billion by the central bank occurred during the month, suggesting they had something to do with the initial decline.
As an export dependent country, the general fear is that the strength of the kiwi would take a big bite out of exports. Both RBNZ Governor Bollard and Finance Minister Cullen had repeatedly warned that the currency is extremely overvalued.Yet despite this strength, the RBNZ had no choice but to raise interest rates four times over the course of 2007 to a current record high of 8.25 percent as inflation growth spiraled out of control. The unprecedented move indicates that this was a very serious step for the central bank and not one that to been taken lightly. However, the RBNZ has not intervened since mid-2007, despite the New Zealand dollar’s climb to a fresh 26-year high of 0.8213. Similar to the Euro-zone, the New Zealand economy is benefiting from the inflation-fighting abilities of a strong kiwi, as the appreciation helps to quell import price growth. Furthermore, when Trichet last used the words “brutal” to describe the currency’s move in 2004, the EUR/USD rallied 13 percent in 2 months. Since the beginning of this year, the EUR/USD is only up 6 percent which explains why the central bank is not stressed about the latest moves. However, if the euro ascent is still taking place when inflationary pressures start to ease, the ECB will likely shift to a more dovish stance and consider cutting rates rather quickly, which would subsequently send the currency plummeting without having to utilize foreign currency reserves and physically intervening in the markets.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/Top4_3-7.gif
Is Intervention Worth the Effort?
As we noted above, the Bank of Japan, European Central Bank, and the Reserve Bank of New Zealand have all engaged in FX intervention with varying degrees of success in the past. With over $1 trillion in official foreign reserves, the BoJ is by far the best equipped to attempt to put a cap on Japanese yen gains as the appreciation seriously impairs the profit margins of Japanese firms. The ECB and the RBNZ, on the other hand, have something to gain from their currency’s appreciation, despite the negative impact it has on exports, as it shields their economies from more severe import price inflation. As a result, the noted central banks may not find it to be in their best interest to make a coordinated effort to fight the market’s clear US dollar bearish tone and intervene physically in the cash markets quite yet.
Trading the News: Canadian Net Change In Employment
What’s Expected
Time of release:
03/07/2008 12:00 GMT, 07:00 EST
Primary Pair Impact :
USDCAD
Expected:
3.0K
Previous:
46.4K
Impact the Canadian employment data had on USDCAD over the last 3 months
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/TTN1_3-6.gif
January 2008 Canadian Net Change In Employment
USD/CAD returned to parity as the Canadian labor markets bounced back in a big way in January, with the net employment change surging a greater-than-expected 46,400. Meanwhile, the unemployment rate surprisingly fell to a 33-year low of 5.8 percent. The January Ivey PMI reading suggested a solid improvement in these labor market figures, and it appears that despite a sharp slowdown in business and trade activity at the end of 2007, conditions improved in early 2008 as domestic demand remains robust. Furthermore, the news indicated that the Canadian economy may be better equipped than previously expected to weather a massive slowdown – or worse, a recession – in the US. Unfortunately we had not traded this release since the first 5 minute candle was not red. http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/TTN2_3-6.gif
December 2007 Canadian Net Change In Employment
December’s labor market data was extremely surprising, as the net employment change unexpectedly fell by 18,700 against forecasts for a gain of 15,000. The manufacturing sector was responsible for most of the declines, as a slump in export demand leads producers to cut back on output and jobs. Furthermore, the news underpinned concerns that the Canadian economy is not immune for a slowdown in the US, and lent credence to the Bank of Canada’s decision to cut rates in December. Unfortunately we had not traded this release, though our trade setup for a dour reading and even a conservative discretionary approach to the data would have been quite profitable.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/TTN3_3-6.gif November 2007 Canadian Net Change In Employment
Once again, the November labor force data from Statistics Canada was providing a fundamental booster for growth forecasts and the loonie. The official consensus for economists’ forecasts was looking for a modest 8,000-person improvement to nationwide payrolls. Crossing the wires more than five times what the market had expected, the 42,600-person jump easily reflected sustained demand for service sector and full-time jobs. At the same time, the change in labor force gauge accelerated for the forth consecutive month, leading the unemployment rate to tick higher from its recent record low – though this was expected. Though we didn’t trade this event risk, the immediate reaction left little room for follow through with parity as support just below.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/TTN4_3-6.gif How To Trade This Event Risk
While the US nonfarm payrolls has historically been considered the top market moving economic indicator for the Forex market, its Canadian counterpart has generated far greater price action over the past three months. Currency traders have responded to the fundamentals with wild abandon as the releases associated with the previous three employment figures have printed at multiples of their respective forecasts. Looking ahead to the February numbers, the market’s response may not be quite as fitful as the moves we saw following the release of the December figures in January. The key difference is the surprise factor: though the net employment change rarely meets economists’ estimates, an unexpected negative reading creates significant volatility. Though all of the components for a surprise employment release and large response from price action are once again in place for Friday’s release, we are unlikely to see a repeat of January. The most recent Ivey PMI report, which was significantly better-than-expected, showed that employment conditions improved and this has worked well as a leading indicator in the past . The official consensus is looking for 3,000-person increase in net payrolls, which sounds reasonable given the Ivey PMI employment numbers. Therefore, a short USDCAD trade on a stronger than expected labor report could provide a profitable trade. Before we even consider taking a trade on this event risk, we need to make sure that the unemployment rate does not tick higher to 5.9 percent from 5.8 percent, as this may eliminate the follow-through potential of a healthy net employment change. Should this conditional be met, we will look for a red, five minute bar for confirmation on a short of two lots of USDCAD at market. We will monitor this trade and all nearby support levels to see if the necessary follow through will be found. An initial stop will be set at the swing high (or reasonable distance) and our first target will equal this risk. Our second target will be based on discretion; and to preserve profit, we will move the stop on the second lot to breakeven when the first hits its target.
In the case that the data proves to be disappointing once again – or worse, posts a negative read – we will use the same strategy for a long trade as we recommended for the short, just in reverse.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/TTN5_3-6.gif http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/other/other/TTN6_3-6.gif
Hedging Strategy of the Week
Currency Pair: GBPJPY
Long Term Bias:Bearish
Long Term Position:Holding Short (from 11/01 swing high at 241.36)
Short Term Bias:Bullish
Short Term Position: Long Against 203.50, Target Falling Trendline (211.60 for 03/05)
The broad GBPJPY trend channel from the November swing high still stands as the dominate trend. Recently, however, the pair failed to generate substantial follow through in an initial downside break below 205. For those traders that are looking to hold with long-term trend and are perhaps already in profitable, short positions from a higher level, a short-term hedge would be wise to eliminate a drawdown with a higher GBPJPY bounce. A hedge should be established to the long side with an initial target of 213.85 and with a stop below the recent swing low at 203.50. Should the hedge position meet its target or stop, it will once again open exposure to the long-term short to profit from the next leg down. A stop on the primary, short on a trend change should be set well above 213.85.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/Hedge/2008.03.05.img1.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/fxcmtr/Hedge/2008.03.05.img2.gif
When should I use the hedging feature?
Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.
The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.
EUR/USD
Strategy: Bullish against 1.4800, Targeting 1.5325
My EURUSD target has been met and exceeded relatively quickly. After surpassing a record high and the psychologically important 1.5000, the world’s most liquid pair is now without a clear target for bullish momentum to mark. My next objective will be defined by major Fib extensions. While the lesser followed extension levels begin around 1.5325, the more popular 168.2% offers euro bulls a considerable amount of breathing room up to 1.5615. Before EURUSD meets this distant target however, retracements are very likely. I will treat pull backs as opportunities to add to my bullish bias until spot pulls back within the wedge that had confined price action from November through the end of February.http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib2_3-4.gif
GBP/USD
Strategy: Bearish against 2.0035, Targeting 1.9400
Bucking the trends that have developed across many of the other majors, GBPUSD has been consigned to the broad range between 1.9975 and 1.9400. This congestive price action interrupts the development of a medium-term bear wave from the November swing high; yet I am not yet comfortable in aligning my long-term bias to this still young move considering GBPUSD’s dominate trend over the past six years has been bullish and the US dollar continues to succumb to fresh record lows. Until pound bulls can overtake 2.0035 or a sharp drop clears support around 1.9335, I will look to take advantage of the range conditions.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib3_3-4.gif
USD/JPY
Strategy: Bearish against 105.75, Targeting 100.00
It took quite a bit of time of congestive price action; but USDJPY has finally found directional price action. The breakout move was established in a sharp drop through 107.00 that easily cleared a closely monitored rising trend channel. As impressive as this move was, I remained on the sidelines until spot cleared its three year low, psychological benchmark at 105.00. I am once again, firmly set in my long-term bearish bias, targeting the nearest Fibonacci extension levels. The 150% extension of the 12/27 to 1/23 down leg happens to fall at the fundamentally significant 100.00 level. Given the Bank of Japan’s history of currency market intervention at this exact level, it seems an appropriate target.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib4_3-4.gif
USD/CHF
Strategy: Bearish against 1.0850, Targeting 1.0200
It took a couple of months, but the market has once again taken direction in USDCHF. Last week, spot had fallen to met its former record low by the end of the same session that I provided my analysis. The following day’s break was momentous and showed little to no hesitation. Encouraged by this impressive move, I reestablished my short bias. My initial target is close at hand on the 161.8% extension of the 12/21 to 2/01 downleg. However, a bounce from these levels may be just that: a short-lived rebound for long-term bears to get back into the market at a better price. A longer-term, yet still very near target, is for USDCHF to reach parity.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib5_3-4.gif
USD/CAD
Strategy: Flat, waiting for confirmed move below 0.9550 or the bull trend to retake 1.0200
USDCAD sustained the selloff that had begun last week. Momentum had easily carried the pair through the 38.2% retracement of the dominate 11/7 to 1/22 bull rally. However, fib congestion from this same move would ultimately offer at least temporary relief from the developing selloff at the 50% retracement level at 0.9715. The rebound from this level seems promising; but I will hold off from reestablishing a long bias until bulls can retake 1.02 as the recent bear swing brought USDCAD to its lowest level in over three months.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib6_3-4.gif
AUD/USD
Strategy: Bullish against 0.9050, Targeting 1.0000
A record breaking run has taken the Australian dollar to a multi-decade high against its American counterpart. Currently, the pair is undergoing a correction – not surprising considering the 1000 point advance the AUDUSD has traversed in a little over six weeks. I will tolerate a drawdown in my long bias until 0.9050. However, even if I am taken out of the market on a AUDUSD decline, I will treat it as a pullback unless spot drops below the 61.8% retracement level of the recent 1/22 to 2/28 rally. With a record high no longer a benchmark, the next reasonable bullish target is parity.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib7_3-4.gif
NZD/USD
Strategy: Bullish against 0.7850, Targeting 0.8275
Bullish momentum gave way shortly after NZDUSD overtook 0.81 – the high water market for the pair since it was allowed to freely float by the Reserve Bank of New Zealand over two decades ago. My bullish sentiment will remain intact until there is a clear and significant reversal in price action. At the same time, I will not sit through a deep drawdown to keep with my bullish convictions. I will hold to my long positioning against 0.7850 and target the 161.8% extension of the 1/15 to 1/22 downswing. Should spot drop below my support, I will stay out of the market until the market has found a floor and bulls have undoubtedly retaken control.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/03/special_report/special_report/Fib8_3-4.gif
Trading the News: German Retail Sales / Consumer Price Index
What’s Expected
Time of release:
02/29/2008 07:00 GMT, 02:00 EST
Primary Pair Impact :
EURUSD
Expected:
1.0%
Previous:
-1.0%
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/02/other/other/TradeNews1_2-28.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/02/other/other/TradeNews2_2-28.gif
How To Trade This Event Risk
Will the European Central Bank finally join the rank and file of the Fed, BoC and BoE and lower its benchmark lending rate; or will President Jean Claude Trichet and his fellow policy makers make their stand with inflation and continue to entertain their hawkish outlook? The answer to this question will not be answered until next week when the ECB announced its rate decision on March 6th; but a volatile mix of growth and inflation data scheduled for release this Friday can certainly guide speculation. Due for simultaneous release tomorrow at 04:00 GMT are the January German retail sales and consumer price index numbers. Together, these two indicators will act as a barometer of the central bank’s two most closely watched economic trends for determining monetary policy: price pressures and growth. The inflation reading will be the less likely market mover as it is a final reading. However, printing in line with its initial release will remind analysts and traders that inflation has cooled for two consecutive months from the November reading, which was reported the fastest pace of price growth since records began back in 1996. Alternatively, the consumer spending data is still an unknown for the market. Up until last year, the economy was coasting along with its strongest growth since the beginning of the millennium. However, the market has taken note of a few critical changes. Fourth quarter GDP cooled to its slowest annual pace since the second quarter of 2006, with personal consumption falling 0.8 percent. Consumer sentiment has held near a two year low and necessary living costs have surged. Perhaps most ominous is the results of the January Bloomberg Retail PMI report which reported slowing sales growth for a fourth consecutive month.
When considering the German fundamentals scheduled for release on Friday, it will be important to take into account the recent strength of the euro (especially against the battered US dollar). For a long EURUSD trade, we will look for a jump in retail sales that at least doubles the market’s forecast (2.0 percent or more). An unexpected uptick in the annual CPI numbers would be certainly boost our confidence in holding a long position as it would further secure the probability that the ECB will hold lending rates untouched; however an unchanged inflation figure work fine. This data could easily fuel EURUSD’s already impressive rally; but it will be imperative to keep our profit targets within reason as sentiment can grow fragile after such a momentous move and position can quickly turn against us with for no fundamental reason. With the right data mix, we will look for a green, five minute bar to confirm entry on two lots of ERUSD with a stop below the nearby swing low (or reasonable distance). First target will equal the risk taken on each lot and the second will be based on discretion (with a mind to volatility). To preserve profit, we will move the stop on the second lot to breakeven when the first hits its target.
Alternatively, a short position would take a fundamental wave that could change the outlook for the ECB’s coming rate decision. We will look both a dip in CPI and a greater than 2.0 percent drop in sales for a short; and we will follow the same setup as above, just reversed.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/02/other/other/TradeNews3_2-28.gif
Hedging Strategy of the WeekCurrency Pair: GBPJPY
Long Term Bias:Bearish
Long Term Position:Holding Short (from 11/01 swing high at 241.36)
Short Term Bias:Bullish
Short Term Position: Long Against 210.00, Target Falling Trendline (213.00 for 02/27)
The risk-sensitive GBPJPY has been carving a downward sloping trend since November. For those traders that have a long-term short position on their books (from a higher level or perhaps speculating on a break in this direction), they should hedge their trades from a potential rally that could overturn a mature trend. Establishing a long GBPJPY hedge around 210.75 will not only cover potential drawdowns during consolidation activity up to 213, it could also dramatically reduce losses in the event of an upside breakout. A stop on the hedge position should be set around 209 to allow the short to collect profit should bearish momentum develop. Alternatively, the primary short should also have a stop above 214 to allow the hedge trade to take over in the event of an upside breakout.
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/02/fxcmtr/Hedging/2008.02.27.gif
http://www.dailyfx.com/export/sites/dailyfx/story-images/2008/02/fxcmtr/Hedging/2008.02.27.img2gif.gif
When should I use the hedging feature?
Markets hardly ever trade in the same direction for long. Though there are general trends that may unfold for weeks, months and years; there is almost always considerable fluctuation in price during these periods – sometimes leading to significant retracements. There are a few common strategies that traders use to immunize their risk to counter-trend moves while still holding to the long-term trend. One method of reacting to these changing tides is to actively enter and exit a trade on each swing, which requires constant attention and a superior ability to pick tops and bottoms. The other, more passive, strategy is to hold on for the long-term trend through retracements in the belief that the higher trend will reengage. Taking a temporary hedge positions through the counter-trend moves, on the other hand, requires less accuracy in picking tops and bottoms and at the same time lowers the drawdown while increasing the potential for return.
The hedging feature is currently available on all accounts using FXCM’s No Dealing Desk service.