Spectrum Forex LLC Blog

The common currency is in the news again and not from a flattering angle. Just one day after a group of 5 central banks moved in to provide stability to the European banking system through liquidity, more concerns emerged. This time Germany’s ruling coalition government delayed discussing the European Stability Mechanism in cabinet, meaning that legislation on the euro-zone’s permanent rescue fund will not likely be in place by the end of this year as hoped.

The ESM is seen as critical to stability and perhaps even survival of the Euro, and most of actions taken so far are only temporary measures before a permanent solution is in place. Unfortunately, steady ESM depends on Germany, because in reality it would be largely that country financing it. Delays there this entire enterprise in peril, even though some lawmakers are still suggesting that ESM legislation could still be passed this year as originally planned. I am sure there will be much conflicting news, leading to new headlines and markets swings. The Euro crisis is alive and well.

As I often do on Fridays, I concentrated on short term trades at the start of the London session. The best candidate was the EUR-USD, where I placed a straddle order, with a sell at 1.3833. That order was tripped quickly turned into a good trade, when it hit the 1.3800 objective. Trading ranges in other currencies were suitable for this set up, so this was the only trade of this nature. Have a great weekend!

Mike K.
www.fxmadness.com

In an unexpected move the ECB’s Governing Council has decided, in coordination with the Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, to conduct three U.S. dollar liquidity-providing operations with a maturity of approximately three months covering the end of the year.  These new dollar operations will be conducted in addition to the bank’s current weekly dollar swaps, according to ECB.

One would think that with all major central banks already operating on maximum “easing mode”,  liquidity in financial markets would not be a problem. Apparently that is not the case, especially for European banks which are getting locked out of USD liquidity pools. European banks need the U.S. currency to fund loans they have extended to U.S. companies and consumers. They also need dollars to repay past borrowings they made in dollars, such as loans from U.S. money-market funds. On Wednesday, the ECB said two banks had tapped it for $575 million, only the second time in six months the ECB has provided dollar funding.

This follows downgrade of some French banks by Moody’s Investors Service yesterday, which cut their long-term credit ratings by one level. Markets are questioning their solvency, based on exposure to Greece. All of this is very speculative and difficult to quantify, so today’s action by the ECB seems to be a preemptive move. Now there are more reasons to believe that the ECB will likely step up its non-standard measures before considering rate cuts. These might include extending the length of its refi operations or resuming its covered bond buying program.

Couple of days ago I took a stab at the NZD-CAD.The idea was to short it at 0.8112. Initially, the trade went fine, with price falling under 0.8100, but then the direction reversed. A little later another push down took it to 0.8071. Unfortunately, that was not sustained and the NZD-CAD started to climb. Since I already have one under performing trade I decided to close this one for a minor gain of 21 pips. Moving on. For Friday I will focus on short-term trades at the start of London session, looking for short-term breakouts in the main USD pairs.  Do not really want to get into trades which might have to be carried over the weekend, because right now I do not expect to be trading on Monday. That is why only short-term transactions, in order to be flat at the end of the week.

Mike K.
www.fxmadness.com

The carry trade has been a losing proposition for some time now and latest data shows that it became even worse, at least according to UBS. Its UBS V24 Carry Index (similar to the Harvest Index), which tracks the performance of carry trades in  24 currencies with higher yields has tumbled 2.6% this month after losing 2.2% in August and 3.1% in July, the biggest back-to-back monthly drop since May and June 2010. While the Index was mildly positive early in the year, gaining 2.1% from the end of January through April, 2011 is shaping up to be another losing for the carry trade, just 2010 when the Index lost 2.5% for the year.

Certainly it was possible to select a currency pair with a positive carry which appreciated to date, for example the EUR-NOK, but as a group this type of Forex play has not been paying off. Recent losses can be blamed by strength in the USD and the JPY, the two most popular funding currencies in the strategy. In addition, “risk on” mode also hurts the carry trade, as it tends to benefit funding currencies and markets have been in this mode more often than not lately.

This chart shows the UBCIV24 for the past few years and as we can see it is in shambles. As a matter of fact at current reading of 453, it is almost as low as just after the 2008 market panic, which included the historic “unwind” of the carry trade. More weakness in the AUD, the highest yielder among majors, especially in relation to the USD and the JPY, could depress the index even further. A dip under 422, the low from 2007, is certainly possible at this stage.
  

Among other things, I am considering a short trade in the NZD-CAD, using the 4H chart. The price established new support here at 0.8115 so my sell order is just below it at 0.8112. Cracking this support should allow for another selloff, to perhaps as low as 0.8000. Because the time frame is fairly large, this trade could take some time….

Mike K.

www.fxmadness.com

Currencies largely ignored limited data releases in early trading  and continued Friday’s trends. Even narrowing trade surplus from China made little impression, a little strange because that means imports are on the rise there. That, in turn, should benefit currencies like the AUD and NZD. Of course, that was not the case and the Aussie, with most other currencies in tow, dropped even more. These moves were large , about 200 pips for the AUD-USD, to 1.0276 and might still not be done for the day.

My main interest during opening hours were short-term corrections (bounces) in Euro pairs. Because the EUR is in the center of this current crisis, one would expect it to be most volatile. It was not, I thing the AUD had this dubious honor, but the Euro crosses still moved enough for potentially decent trades either way, including the minor rallies I was looking for.

The EUR-CAD, and many other currency pairs, opened with a small gap. It was closed almost immediately and then the price resumed downward trajectory but found support just under 1.3500. After that, the first completed  bullish candlestick on hourly chart was the entry signal and this trade brought 78 pips, within the expected range. There was more potential, because the price rallied to about 1.3700, but I was content with the outcome.

Meanwhile, markets appear to be ready to test resolve of the Swiss National Bank. Last the SNB drew a line in the sand by intervening in the Franc and setting a floor for the EUR-CHF at 1.2000. Interestingly, this pair did not really sell off on the Euro weakness. Still, the price is drifting down, slowly approaching the “floor”. I have a buy order at 1.1950, with 1.2100 objective. This is a very small trade, because risks are big – no logical stop area for hundreds of pips, so my risk is arbitrary 100 pips. There is talk about hedge funds and other trading entities betting against the SNB – exotic options wagers that pay off if the Swiss National Bank fails within six months and the Euro falls to parity with the Franc. We shall see soon if the central bank indeed defends the “floor”.

Mike K.

www.fxmadness.com

The G-7 meeting over the weekend produced no measurable results. Some statements about “coordinated efforts” to do this or that, one more vague than the next. But it should put off default talks ( Greece) off by, say few days or couple of weeks, before they resurface again. Some expected a default announcement as early as this weekend, something that did not happen. Even the question currency interventions by individual countries has not been clarified. For example, Japanese officials claim to have received G-7 blessing to intervene in Yen, while other delegates did not confirm that.

Meanwhile, countries start to criticize one another for actions leading to weakening of domestic currencies. A senior Japanese official expressed frustration with moves by the Bank of Korea to curb the won. The BOK has intervened frequently in the foreign-exchange market to stem its rise. Puzzling coming from a country which also takes active steps in the open markets. This latest accusation follows criticism of Switzerland by Norway and Canada, for moves taken this week to cap the rise in Franc.

Norwegian central bank Gov. Oystein Olsen warned investors that a strengthening Krone would stifle Norway’s economy by hurting exports. A swift policy response, like lowering interest rates, will be considered if the NOK keeps rising. Fundamentally he has a point – CHF is involved in about 6.5% of totat Forex trading volume, while NOK comprises only 1.4% – meaning that even a small shift from Franc to Krone could send it soaring. technically, though the NOK does not have that much immediate potential. Against the Euro, it already moved through a major support at 7.6240 and the next one nearby at 7.2165. There are better chances for a substantial rally in the EUR-NOK than a new all time low. However, if the currency wars erupt for good, all bets are off.

 From more immediate perspective, the sell off in the Euro could be overdone for a while. Most of the EUR pairs closed at or near daily, and weekly, extremes on Friday. This sets up possible short-term reversal trades in early market hours. In the EUR-CAD, for example, I will look for a candlestick reversal pattern on hourly chart. Once the exact entry becomes obvious, the objective will be set, most likely between 60 to 90 pips. Also of interest are EUR-USD, EUR-GBP, as well as AUD-USD, CAD-USD and NZD-USD. In addition, opening gaps are possible, creating trading opportunities. Have a great trading week!

Mike K.
www.fxmadness.com

In spite of repeated threats of intervention, the Bank of Japan is still only talking about it. Perhaps they are concerned that any new effort would only result in failure just like the most recent intervention. A lot market observers expected Japanese financial authorities to do something after the Swiss National Bank set the intervention tone earlier this week. Because this particular action was different from a typical intervention, chances are that BoJ is simply watching to see in these steps will have staying power.

There are other considerations, too. It would be more difficult for Japan to set celing/floor targets for Yen because it trades at 3-4 times the volume of Swiss Franc. For this tool be effective in case of economy of that size, authorities would have to impose capital restrictions or even   abandon its monetary policy, something that might not practical here. Instead, Japan appears to be taking another path by arranging for a coordinated action with other central banks, similar to what happened in March.

Japan was supposed to bring this matter up during the current G-7 meeting in Marseille. Details are sketchy but Japan said it had received G7 blessing for unilateral foreign exchange action. However, other delegates said the issue had not really even been discussed in depth by the meeting, and the statement had simply used the wording of previous statements. In the end, as it is often the case with the BoJ, there is more talk than action and markets are left guessing….

Intervention or not, I have a long trade in the USD-JPY based solely on charts, as discussed in the last post. My entry was at 77.77 seeking at least 100 pips. Because this pair is not moving a lot now, the ATR is low on all time frames, I do not realistically expect a speedy resolution. This trade was initiated on Friday and immediately dropped into red on increased volatility, but is recovering now. We shall see what happens after the weekend.

On Firdays I often focus on trading at the start London session, and yesterday was no exception. The GBP-USD created a good breakout set up, with nicely defined entries for either side of the market. While it took a long time for a move to come, almost 3 hours, eventually the price full sharply. Result was a quick trade on the short side, which brought 40 pips in minutes. Real movements did not come till later in the day and I will discuss them tomorrow when looking for clues for opening trades. Have a great weekend!

Mike K.

www.fxmadness.com

Currencies were relatively quiet on Wednesday, as if taking a break after the SNB intervention a day before. More likely, though, focus moves to policy meetings of the BoE and the ECB. The Bank of Canada announced its own interest rates decision, leaving its benchmark unchanged at 1.0%. There was no substantial response form the markets, even the Canadian Dollar did not move much. Probably the best performing currency was the Australian Dollar, which rallied all day after positive GDP Data. Gold, however, had an eventful day, falling to 1792.

Gold was of interest to me because of the rear instance that I took a trade in this market, especially a short-term trade. It was a position on the short side, with entry at 1873. This trade was closed at 1800 for 73 points profit, which just fine for only one day holding time. I will probably return to gold, when (if) I find a convincing set up to sell with a larger objective of 300+ points. For now, while I think that this market is ready for a sharp drop, I simply do not see a technical situation which would warrant a trade, like the one I found in silver earlier this year. Back to watching and waiting.

 Besides the already mentioned central banks’ meetings, we also have employment data releases from Australia and Switzerland. With so many big fundamental announcements I do not really want to position myself in some of these currencies prior to news. With this in mind, focus goes to the USD-JPY, which established a solid resistance at just above 77.70. IF this level gives way, a decent rally should follow, so I have a buy order at 77.77, seeking 100 pips.

Mike K.

www.fxmadness.com

The Swiss National Bank has finally decided to bring out a big gun to its fight over strong Franc. Non only did they conduct a massive intervention, they also drew a line in the sand, pledging “unlimited Euro purchases” if the EUR-CHF drops below 1.20 again. The central bank called it “setting a ceiling” for the CHF (or floor for the most of its pairs). This means, supposedly, that interventions will continue every time the exchange rate between the CHF and the EUR gets under 1.20. What it does not mean is a peg – the Swiss Franc was NOT pegged to the Euro, at least not yet.

If Franc was to be pegged, the SNB would have to shadow all policies of the ECB, something they clearly do not want to commit to. However, if the current action proves futile and over time they are not able to contain the CHF, they might have to do just that. Interestingly, should such time come, the decision should not be too difficult. After all, the Swiss pretty much committed themselves to inflation. With prospects for the Euro bleak, chances are the SNB will have to deliver on its promise time and time again, spending, by some estimates as much as CHF 0.5-1.0 trillion in coming months. Given the small size of Swiss economy, it is a staggering amount of money.

Of course, they could succeed in achieving their goals, too, like in a similar operation in 1978. At that time the Swiss National Bank managed to keep the Franc below 80 francs per 100 Deutsche marks in the two decades through 1998, before inception of the euro by Germany. During that period, Swiss inflation exceeded the SNB’s 2 percent limit in 12 years. At any rate, all this is speculative and will be discussed plenty of times in the future. Today, the EUR-CHF jumped over 1100 pips, the biggest intervention move that I recall.

As mentioned yesterday, I had both a buy and a sell order in the USD-CHF. The buy side of the straddle was filled and my objective of 100 pips was reached easily. Obviously, I had no idea what the SNB was up to, otherwise this trade would be on for much longer… Should not complain, 100 pips is 100 pips, but I’d be lying if said I was not a little disappointed….

For right now I will stay with the theme established yesterday, meaning gold. This market just made a divergence on daily chart, with a possible sell signal on the bearish engulfing line. I went short at 1873, targeting 1800, maybe 1775. Risks are small here. Ideally, I would prefer a longer-term trade with 300-400 dollars objective, but I simply do not see one here. One more thing on the subject of the CHF- charts are distorted now, and markets are jumpy, so I will let the them settle down before making more trading decisions.

Mike K.

www.fxmadness.com.

Back from vacation and I see that currencies are as confused (or confusing) as when I left. It did not help that the Non-Farm Payrolls report shows US employment is in a gutter. Now Obama will have another “speech” about how to fix it – plenty of speeches, little results. Since I did not follow the markets (had to detox my brain from overload of numbers and graphs) it will take me a day or two of watching live action to become comfortable placing trades. However, a non directional play is in order, as always following the Labor Day.

The USD-CHF contracted sharply on Monday, as expected, so a simple straddle here is preferred strategy. Normally, I would hold a trade initiated in this way most of the day, until about 12-13 EST, anticipating a full day of directional movement. But this time I have objective of 100 pips either way and will still be watching it closely. Given the state of uncertainty that currencies are in and huge number of economic releases on Tuesday, I will just try to grab what I can.

While on the subject of economic news releases, Aussie will surely be affected. Among many announcements is the RBA Interest Rate Decision, followed by data from China, which also moves the AUD. The recent rally may have reversed, suggesting a downtrend, but there is also a gap from the opening, which indicates a potential small rally first. All said, the AUD maybe in for a rough ride on Tuesday, one that could spill over to other currencies. To add to confusion, the Aussie diverged from gold, too.

Gold shook off bearish jitters and resumed the uptrend. This means that my sell order in gold at 1700 went unfilled. It is however, still active. In addition, now that price is attempting new high, there is a chance for an MACD divergence. For that, we need to see a strong bearish reversal candlestick pattern on the daily chart, preferably on either Tuesday or Wednesday. If it does not happen, there will be no trade, as gold will likely try to test the 2000 level. Regardless, we are facing an interesting week, with four interest rate decisions and multiple employment and trade data releases from all over the world. Wish everybody great trading!

Mike K.

www.fxmadness.com

There were some developments over the weekend that could affect opening of financial markets. To make matters worse, these developments are difficult to judge not only in severity but also in possible direction markets might take. After increased volatility following Bernanke’s speech on Friday, it will be interesting to see if other luminaries gathered in Jackson Hole can also move the markets. On Saturday Lagarde and Trichet had their own speeches which have not been disseminated yet. As far as I am concerned, they did not say anything interesting, but other, more important market players might disagree and commit enough money to create moves.

Perhaps more interesting and unpredictable, is the impact of hurricane Irene on US markets. Major U.S. exchanges are preparing to cope with power outages and flooding that might interfere with trading on Monday. The New York Stock Exchange and Nasdaq repeated on Saturday that, despite the arrival of Irene in New York, both expect to conduct a normal trading session on Monday. The Big Board said a final decision would be made over the weekend, particularly on its trading floor in the low-lying financial district of Manhattan, which could see a storm surge and flooding. In addition, many locals might not arrive to work, further impacting trading.

From a practical point of view, it is not too important to me what happens in early trading because I will not participate. Vacation time, a little travel and relaxation. However, the longer term gold chart looks very interesting at this point and I might just be tempted to keep my eye on it. In short, it looks oversold and ready for a serious correction. The weekly chart of gold is very similar to silver before the big selloff in May. It is in a parabolic run, with a through the roof volatility and finally showing some cracks.

Gold rallied to 1911 and looked ready to test the 2K level. Instead, it fell sharply, by about $200, before recovering late in the week. This action established a good sell point at 1700, with a 200 points objective. If the price keeps making new highs, I plan to simply move the sell order to just under next higher low and possibly catch a good down move, just like the silver trade before. I will worry about currencies upon my return before the Labor Day. Have a great trading week!

Mike K.

www.fxmadness,com