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Posts Tagged ‘EURNZD’

The EUR/NZD pair, similar to the GBP/NZD pair ascension, rose practically unabated for the first ten weeks of 2011, gaining over 2600-pips in the process.

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The pull of tomorrow’s event risk is strong. For a definable and potential overwhelming impact on price action, we have the US non-farm payrolls report for May. This indicator has been hit or miss for the past few months; but the forecast for this month’s reading carries a little more weight with a consensus forecast for over 500,000 jobs added. This would be the biggest increase in years and could trigger a few fundamental ripples in the currency market. On the one hand, the market can take this data as a sign that the outlook for growth and yield expectations behind the US dollar are that much better. Alternatively, such a strong reading may help to revive severely depressed investor sentiment market-wide and thereby send the dollar careening while the euro, sterling and commodity currencies rally. Then again, perhaps cool heads will prevail and traders will recognize the headline figure will not alter the long-term trend in place. It is difficult to tell ahead of time. Other fundamental threats on the horizon include the Canadian labor data and the start of the G20 meeting.

With this heavy event risk in place, the market will be anchored down. Liquidity will thin out and entry orders will be placed on the other side of major technical levels. This could lead to the off-chance of a premature breakout on a speculative push; but more than likely, it will keep pairs range bound or moving in the direction of least resistance. With broad ranges to work with; my yen shorts were both stopped out as AUDJPY and NZDJPY pushed back above former support / new resistance. Looking at my other positions, EURGBP is still well placed and the relative fundamental balance between the euro and pound will give this cross some buffer room. My USDCAD short on the other hand is far more exposed to tomorrows festivities. The direct effect of the data and indirect echo through sentiment channels could leverage considerable volatility. However, I have my trailed stop in place and my first target was taken long ago. Another position I took last night was a short EURNZD. A descending wedge formation was coming to an apex; so an immediate break seemed highly likely. Pushing below the range support and notable pivot at 0.7965, I jumped in. Follow through is relatively week (to be expected); but given tomorrow’s event risk, I have already moved my stop up to breakeven even before I have hit my first target of 0.78.

Also, in preparation for the potentially high level of volatility tomorrow, I am watching a few pairs specifically for their considerable potential. In a scenario where we have potential trend generation for further dollar buying, I will look for a break of EURUSD’s long-term midpoint below 1.2135. Alternatively, a reversal of the dollar’s six-month rally, will lead me to USDCHF. Holding below a long-term descending trendline, this pair has developed a clear floor at 1.1450. Looking for short-term potential in sentiment fluctuations, EURAUD has set up a technical pattern similar to EURNZD with a pivot support at 1.4425. Something to watch.

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Volatility is still extraordinarily high this morning; and there were some particularly dramatic moves with a few individual currencies. To start things off this morning; we have another swing in risk appetite as can be established through equity, commodity and debt markets. However, looking at a longer time frame, we see that this is just another aggressive shift in an otherwise stable range. We are still suffering the high level of activity without a clear bearing to define the next viable trend. Currency traders are privy to the difference between a highly granular picture of the markets and that of price development over the past few weeks; and from this, we are starting to see less reaction to the rapid changes in sentiment. Most notably, the euro is seeing less and less relief with improvements in risk positioning. This suggests a greater awareness of higher time frame congestion and thereby an effort to moderate choppy price action. Yet, that does not mean there aren’t trades out there. Aside from the range potential out there, a few pairs are already developing fundamentally-derived and technically triggered trend; and we can already smell the possibility of a market-wide trend development on the winds.

When the markets are moving towards trends, I see considerable potential across the spectrum. However, at the top of my list I like a EURUSD short on a break of its historical midpoint at 1.2135; and as an alternative, USDCHF could stand as a better option for a dollar reversal – should that be the trend that emerges. Another short-term breakout setup comes from EURNZD. In a terminal wedge similar to EURUSD on the short-term charts, a break of 1.7950/75 would be the preferred outcome. As for my existing positions, a EURGBP rebound to test former support as new resistance is too be expected. Nonetheless, I am still in the money on the added portion of the position and well in the money on the original exposure. My USDCAD short didn’t hit it stop overnight; and now we are on the verge of extending the bear run below 1.0410/20. Unexpected news this morning that the Japanese Prime Minister was resigning after an unsuccessful eight-month stint at the top position has set back my AUDJPY and NZDJPY shorts which were performing well before the announcement. Ultimately, both are still bound by congestion.

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The fundamental winds haven’t shifted; but the principle reactors to the drivers have certainly been switched up. Until recently, the euro was one of the most prominent short-side currencies when risk aversion was picking up due to the immediate concerns surrounding the European Union and its mismanagement of Greece and other fiscally irresponsible member economies. This morning, risk appetite has extended its descent with another marked tumble in equities; but the euro itself has held up relatively well. Why is this? After plunging approximately 3,000 pips in 6 months, there is a sense that EURUSD has perhaps moved far enough to be reevaluated for its sense of equilibrium. This does not mean the decline is over – especially if another crisis ripples through the region – but until something notable occurs, pure speculation and conjecture may not be able to sustain the momentum. At the same time, FX traders that have grown used to the market’s high level of volatility are looking for those currencies and pairs that are exceedingly mispriced given the direction that speculative trends have maintained. Under the crosshairs now are the commodity currencies which until recently have proven themselves to be pretty resilient to the rise in pessimism.

As for my positions, I have booked profit on the rest of my EURAUD long position (which looks hasty now). My other active euro position, EURGBP, has not hit its stop; but it has come close. Still in the money on this setup; I’ll wait to for either the stop to trigger or an eventual bearish break. Adding to my euro interests this morning, I have taken a EURNZD short that should not be held for too long. A test of a descending trendline and 50-day SMA (along with the fundamental concern that the Euro Zone’s troubles aren’t done and the kiwi is looking at a full chamber of rate hikes ahead of it); this looks like a descent short position with good carry as long as the risk aversion move doesn’t become too panicky. My best performers this morning though are my short AUDCAD and AUDCHF. The formers bear trend is now mature; and the latter has finally confirmed a bullish trend channel break with substantial downside potential. I have already hit the first target on both for 440 and 475 respectively. Keeping my eyes open, I’m also going to look for a possible rebound on the AUDJPY range low break (I missed the overnight entry), I am also looking at a strong range on CADJPY and waiting to see what EURUSD does at its historically 50 percent Fib retracement.

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There has been a notable correction in some of the more dramatic moves over the past 24 hours; but there has been little more progress made on big fundamental issues or on particular currencies. This leaves me with little in active positioning but with many ‘potential’ setups. As for the yen focus that we usually maintain on Wednesday’s, there is the potential for some elastic reversal activity on CADJPY and AUDJPY; but that would entail fighting a trend that has been revitalized by volatility – a dangerous prospect. However, there is some potential to be found in the crosses with the european currencies. EURJPY is trending higher within a channel; and there could be a setup with a dip back to relative support back at 123.15/45. Better tuned for a breakout rather than tame trend play is the 145 range high on GBPJPY. These two may take time to develop and fundamentals may undermine their appeal well before we come to activation.

In the meantime, there are some other pairs that I am currently more interest in. My only active position at the moment is a short EURGBP setup taken after the break of a 16-month asymetrical wedge formation. The bottom node of this formation can be drawn from the swing lows of 6/22/09 to 8/06/09 to 2/18/10. However, technical analysis is just as much an art; and the trendline can potentially be redrawn such that today’s low still fits within the boundaries of the congestion pattern (with a loose follow support around 0.8675). With this in mind, along with the fundamental anchor that is next month’s UK election, I have only taken a small position and am looking for the aformentioned support to give way before I dive in for an extended move. Other interesting pairs included the Canadian dollar’s undervalued interest rate potential in AUDCAD and a potentially overspent premium build in USDCAD. Elsewhere, EURNZD looks like a mature trend that could truely find fundamental support in continuation while USDCHF has the technical setup (long-term wedge) that could be pressured by SNB intervention. Many pairs to watch while we await direction on the bigger themes.

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The fundamental health of the euro is a tenuous subjective. Over the past week, it would seem that the threat of an imminent default from Greece and the potentially crippling side-effects such an event would have on the rest of the region have passed. However, this brief period of calm should not be hastely labeled a shift in confidence. A reprieve from strong winds in risk aversion has been noted across securities and asset classes. This has in turn tempered concern surrounding the health and stability of the Euro Zone. In the meantime, policy officials have been scrambling to put in a fundamental support to the clearing in sentiment. Will they be successful? This is a question that could ultimately define the direction of the euro. Should underlying risk appetite falter before a meaningful solution (a clear bailout option for Greece or a European Monetary Fund) be put into place; the threat to the regional economy and currency can prove prolific.

Considering the influence that large fundamental themes have for this currency and the unpredictable nature of their development, it is a dangerous game to trade euro crosses through the medium and long-term. A quick swing that takes a few days is perhaps the best option for this tense unit; but there are no immediate setups. However, we can establish scenarios and opportunities for either high volatility and low volatility situations. A high volatility scenario would most likely lead to a breakout. No where is a breakout more promising than with EURUSD, which has been set within a 1.3700 – 3450 range over the past two weeks. A revesal of the past three months’ bear trend has the greatest immediate potential; but I would be open to a confirmed break on either side of the market. A stop will be placed above or below the previous daily bar’s high or low (depending on which direction the break occurs). Some other pairs see a better opportunity for reversal. EURNZD is a risky bet for a reversal; but a clear floor at 1.93 offers a meaningful backdrop. EURGBP is more fundamentally enticing as the UK’s troubles are obvious; but the Euro Zone’s issues are clearly being undervalued. Technically, the unsubstantiated trend from the 12/30/08 to 10/14/09 highs set a technical marker along with the 61.8 percent Fib of the October to January bear wave at 0.91. Short entry at 0.9115 offers the best probability for an active position over the immediate future. A stop of 0.9165 will cover the November swing high and a first target of 0.8925 will more than compensate for the risk.

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