It seems as though the market close on Thursday has encouraged some fresh currency long positions with the Euro failing to show any signs of stalling and in fact accelerating to fresh multi-day highs beyond 1.3100.
This has propelled gains in the antipodeans, which even outperform the Euro on the day thus far, while all other major currencies are also tracking higher against the buck. For now, the key level to watch above comes in by 1.3170 which represents the 78.6% fib retracement off of the major August high-low move. The 78.6% fib retrace is the final defense for USD bulls, with a close above this level to likely open a complete retracement back towards 1.3335.
Relative performance on Friday versus the USD (as of 09:30GMT) –
1) KIWI +1.05%
2) AUSSIE +0.94%
3) STERLING +0.51%
4) EURO +0.42%
5) CAD +0.33%
6) YEN -0.05%
7) SWISSIE -0.13%
While the yen and swissie are also higher against the buck, gains in these currencies are only marginal, and this is completely understandable given the recent shift in policy from both respective central banks. In Japan, the central bank has aggressively reentered the market to intervene on behalf of the yen this week, while in Switzerland, the SNB has come out with a much more downbeat assessment of the economy, while also expressing deep concern over the negative impact that the appreciation in the franc is having on local business.
With the calendar fairly light in Friday trade, we would like to take the opportunity to present two medium-term to longer-term trading ideas that we feel are highly compelling:
The EUR/CHF cross has recently dropped to fresh record lows below 1.2800 before finally finding some form of relief over the past few sessions. However, we contend that there is plenty more upside ahead, with the monthly RSI only just now crossing up from oversold levels. Fundamentally, risk appetite should start to really pick-up, the cross should certainly benefit, with much of the relative strength in the Swiss franc over the past several months coming from its safe haven appeal. But we also see decent risk to the upside even in the event of a less upbeat market environment in light of the SNB’s serious concerns over the level of the Franc and its negative impact on the economy. It should also be noted that a long position, in this cross, offers a positive carry, albeit a baby carry, that effectively pays investors for every day that they hold the position. We contend that the yield differential which already favors the euro will become even more attractive going forward as the ECB eventually begins to reverse monetary policy.
EUR/AUD is another cross rate which we believe has fully run its course and is now on the final leg of an intense downtrend. This cross now shows a monthly RSI that is severely oversold and well below 30. While a long position in the cross is certainly less attractive from a rate differential standpoint, the market is clearly at some major cyclical lows and shows enough upside potential to more than offset any fallout from the negative carry. Fundamentally, should risk appetite pick-up, we believe that most of the strength of the Australian economy is as priced in as possible. But in the Eurozone, there is much less optimism priced into the market, which theoretically opens the door for a faster appreciation on a relative basis in the euro. In contrast, should we continue to see a global macro economy that is seriously uncertain and fearful over the outlook for the global economy, we also believe there is tremendous upside potential for the cross, with the RBA then becoming much more uncomfortable with its tightening policy and most probably forced to reconsider just how fast rates were hiked over the past few months. Certainly a negative risk global environment supports the argument for a shift from higher yielding currencies to lower yielding ones, which effectively would translate into a higher cross rate. Remember, the Australian economy is extremely reliant on the success and growth of China and India and should there be any signs of weakness there, the Australian Dollar will be at risk for major depreciation.
We do not recommend any specific positions in these crosses at this point, but would instead just like to bring these markets to your attention in case any of you are looking for a low leverage longer-term play. These are certainly two of our favorite trades over the next 12 months.
Looking ahead to the North American economic calendar, US consumer prices (0.3% expected) are out at 12:30GMT, followed by University of Michigan confidence (70.0 expected) at 13:55GMT. US equity futures are pointing to a firmer open, while oil and gold are also well bid. Gold continues to extend gains to fresh record highs. Have a good weekend.
USD GRAPHIC REWIND
EUR/USD: The daily close above the 61.8% fib retracement off of the major move from August has seriously dampened bearish prospects, with the market racing above 1.3100 thus far. Next key resistance comes in by 1.3170 which represents the 78.6% fib retracement off of the August move and the final line of defense for USD bulls before a full retracement to 1.3335. A close above 1.3170 will open a direct retest of the critical 1.3335 highs, while a close below will still keep alive the potential for a bearish resumption. For now, 1.2975 is the key short-term level to watch below, with the break to officially relieve topside pressures.
USD/JPY: The major downtrend could finally be at risk of expiring following the latest surge back above the 20-day SMA. Wednesday’s close above the 20-Day SMA was indeed the first obstacle that needed to be overcome to potentially force a shift in the structure, while the next test will be the Ichimoku cloud bottom that comes in around 86.20. Daily studies certainly show plenty of room for additional upside, so we would look for a break into the cloud (currently defined roughly between 86.20-88.50) before considering any possibility of a bearish resumption.
GBP/USD: The latest break back above 1.5700 threatens the integrity of the downtrend and potentially exposes a move back towards 1.6000 over the coming sessions. It is, however, worth noting that the 61.8% fib retracement off of the 1.6000-1.5295 move, comes in by 1.5730, and should we manage to close below this level, the bearish structure will remain intact.
USD/CHF: Finally showing some serious signs of a material base, with the market very well supported on dips below par. Medium-term and longer-term technical studies certainly confirm the possibility of some major upside ahead, but for now, we will need to see a break back above next key topside barriers by 1.0280 to reaffirm recovery prospects.
Real money accounts are buyers in both EUR/CHF and EUR/JPY, a European hedge fund was a noted seller in EUR/GBP. Japanese mega bank buying followed by specs in USD/JPY. Asian sovereign accounts are on the bid in EUR/USD.
TRADE OF THE DAY
CHART 4AUD/USD: We like the idea of fading any rallies towards 0.9500 with the psychological barrier offering itself as a formidable medium-term resistance zone. While the market has managed to break to fresh 2010 and multi-month highs to potentially open the door for an upside extension towards 0.9800, we do not see things playing out this way, with the current move classified more as a minor overshoot that should ultimately result in yet another major medium-term top. Indeed the daily RSI has crossed above the 70 threshold to confirm the overbought nature of daily studies and reaffirm our bearish bias, while hourly studies are also supportive of the counter-trend position. Ultimately, only a close back above 0.9460 would negate and give reason for concern. POSITION: SHORT @0.9462 FOR AN OPEN OBJECTIVE; STOP @0.9562.