19th Dec 2013 - IS AUDUSD poised for a minor correction?

Early this morning we saw the FOMC finally pulling out the "T" word - Tapering.

"The Federal Reserve announced Wednesday that it would reduce its USD85 billion-a-month bond buying program by USD10 billion in January. In his last press conference as Fed Chairman Ben Bernanke said the economy was continuing to make progress." (Source : http://www.investing.com/news/forex-news/forex---dollar-back-off-5-year-highs-vs.-yen-after-fed-taper-move-256952)

This move was not totally unexpected, as the FED had more or less toyed with the market for the better part of the past 6-8 months. The move resulted in a sudden surge in the strength of the USD, but the effect was rather mixed throughout the various major pairs. In this article, my focus is on the AUD.

Technically

- The major trend is in a downwards continuation

- The Trend within Trend is in a downwards continuation

- Major support has been broken, but price still hovering in support region

Fundamentally

- Market has taken over with at least one known general consensus, first step in tapering has started, which could mean that further cuts could also be in the coming. Although it has not happened yet, market will be in bullish USD sentiment for awhile

- Hot money still on the table ? FED has done a great job by setting the stage where it has convinced the market that "Tapering" & "Interest Rates Increase" are 2 separate matters, and can be dealt with separately.

- Worldwide stock markets rallied, indicating market stance of "risk on" mode, but perhaps more cautious at this time until the unavoidable OPTIMISM creeps in, and it will

- Given the above, my view is that FED has smartly conserved its ammo for the next round of market manipulation

How to Trade

Cracks appearing in AUD

Last week, I was surprised but not too surprised by ECB rate cut happening. I thought the possibility might come up, but not so soon. However, the fact that it did happen gave me reason to re-look at the markets and here are my latest views on how this will affect AUD, both technical and fundamental.

Technicals

- Price started easing off towards the break of the uptrend channel lower trendline, at at time when market was all about non-tapering

- Last RBA rate review, RBA rate statement did not provide the push downwards I was expecting, but sellers started showing themselves in the region indicated by the orange circle as shown, indicating the resistance of the retest line was still holding although price still wanted to break free

- 1st blue retest line support finally broken, something I had been waiting for

Fundamentals

-ECB rate cut has set the stage for other central banks apart from FED to start lowering interest rates to protect/boost their own country economy

- RBA rate statement was hawkish, indicating they are still open to having a much weaker currency. It created a huge red candle but not strong enough to break the then minor upwards trend within trend

- Although FED has not started to taper the QE, they have started to show signs in the last FOMC statement that they are slightly more optimistic about the future of the economy, by omitting some negative statements that in previous FOMC statements (Source : http://www.investing.com/news/forex-news/dollar-firms-up-vs.-rivals-after-fed-254553). The markets have clearly interpreted this as the FED looking to taper soon....If this happens, "Hot Money" will be retracted suddenly, and forcefully, and AUD will be one of the casualties

- RBA has maintained all the while that they think the AUD is still overvalued, this stance has not changed since before even the latest Australian Election

- Last week, from November 4th - 8th, datas coming out from Australia ie Retail Sales; Trade Balance, whose readings were better than expected, hardly rallied the AUDUSD, but a worse than previous reading of Employment Change caused the AUDUSD to erase earlier gains

- US has finally shown signs of putting into gear the start of Tapering, of which the inverse is what caused the AUDUSD to gap up in the first place, I believe the reason no longer existent which caused the rally of the AUDUSD

- Much better than forecast NFP data coming out crashed the AUDUSD, and will give reason to the FED to perhaps start their Tapering of QE soon

Conclusion

I believe the AUD USD will respect the latest downtrend Trend Within Trend, and there are plenty of fundamental reasons in favor of a cheaper AUDUSD, whilst technicals can speak for itself. I will be looking to sell the AUDUSD come Monday morning market open

UPDATED USDJPY TRADE 1ST NOV

Read below for the original trade idea!!!!!!!!

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The USDJPY has been stuck in a direction-searching movement for a good few weeks, and has long since come off the high established since late May 2013, as the steam provided by the actions of the BOJ, namely the stimulus in the form of bond buying has since lessened considerably. However, from May onwards until now the consequences of this action are still evident in the movements of this pair, especially whenever Japanese data points are released that indicate weakness in Japan's economy or whenever the BOJ's governor, Kuroda comes out to emphasise to the world that the institution is going to continue its large scale easing until its objectives are met.

However, the weakness in the USDJPY of late has largely been determined by the drama unfolding in the US and the focus on whether the FED will TAPER or NOT TAPER, and hence, the flight to safety came in often, and the short USDJPY risk off trade has been a source of profits for many in the market. Still, we can see from the charts that the strong uptrend previously created is still largely intact.

In recent developments, we can see that the USDJPY has since found a support level after systematically moving within a huge trend channel.

So how will I trade this pair? Let's take a look on a shorter term timeframe

As the UJ has convincingly broken out of this downtrend, I am of the view that it will continue upwards to the target I have identified above. Barring any changes in the fundamental factors, I will continue looking for good entry points to buy until that level. As Japan has stronly reiterated its stance on its monetary policy and objectives, I am comfortable being bullish on the USDJPY even if the FED does not taper its QE until early next year, and will be looking to go long even if the USDJPY falls to lower levels.

I have already started going long as I had taken a chance on the breakout happening based on observations of technical and fundamental factors.

* This article is a courtesy of www.traderence.com, under Traderence Holding Pte Ltd

Is NFP strong enough to provide direction for pairs?

As the trading day progressed today, we could witness largely indecision in the markets with regards to the USD and the general sentiment towards the health of the global economy on Monday.

Throughout the day, limited movements were experienced in most of the pairs, as it became more and more evident that the market was waiting to see where the US economy will be headed. Although the US government shutdown has since been ended, it is estimated that as much as hundreds of millions of dollars a day was lost with each day the government was shutdown.

This has put traders on the defensive in buying into the USD as the market may see this as a factor that could delay the tapering by the Federal Reserve(US Central Bank) of its monthly QE activities to the tune of 85 billion USD until it can see better data coming out in support of the economic recovery it is pushing so hard for. The market was expecting an October tapering, or perhaps even November, but the government shutdown has since changed the views of many, who think that it has hurt the economy and hence delayed the recovery.

With the exception of the USDJPY & GBPUSD, most of the major pairs showed little directional bias, although the EURUSD & USDCHF did provide some movement but still ended up largely unchanged.

The directional movement of the USDJPY was largely due to JPY weakness as it showed a worse than expected "Trade Balance" number and from statements made by the BOJ governor Kuroda who reiterated that the bank would stick to its stimulus program. (Source : http://www.investing.com/news/forex-news/dollar-moves-higher-vs.-yen,-u.s.-data-in-focus-254091). Even then, the price action shows signs of a shallow movement indicating caution by traders.

This would support my view that the NFP reading coming out from the US which was delayed due to the shutdown of government services, and originally scheduled to come out October 4th, and has now been rescheduled again to 22 October, is in the focus. Depending on how much it will deviate from the forecast, this could be the catalyst that could tip the currencies in either direction and provide some volatility in the markets. Coupled with some data coming out from China in the morning, I am certain Tuesday will be a much more eventful trading day and I will be ready to take advantage of the movements!

GBPUSD reversal coming in?

So, it seems that the minor downtrend being formed in the GBPUSD has been solidified and established? However, is this just a pullback before going even higher or is a reversal actually coming in? Let's take a look;

Much will depend on the stance of the BOE and its governor Mark Carney, and what the decision will be in terms of its monetary policy, ie whether the BOE is going to reduce, maintain, or increase interest rates and what their justification behind its move will be.

In fact, it was because Mr Carney did not increase interest rates which disappointed the GBP bulls, and prompted the strong upward movement to start easing off.

The fact that the US government is taking the first steps to bridge their disagreements between the Republicans and Democrats in terms of the debt ceiling and government spending is giving USD bulls some reason to celebrate and we can see it being reflected in most of the major pairs, ie USDJPY, EURUSD, and of course the GBPUSD. (Read : http://www.investing.com/news/forex-news/dollar-firms-up-on-u.s.-debt-ceiling-deal-hopes-253718)

Of course, the announcement by Barack Obama on the next person he is tapping to be the Federal Reserve chairperson has eased alot of uncertainty and also yesterday evening's FOMC meeting minutes have given the market the impression of tapering "ALMOST" being on the table.

Well, if you are also looking at the 7pm "Asset purchase facility" and "Rate Statement" reading, you might also want to take a minute to look at what Mark Carney and his team are thinking or looking at. (http://www.bloomberg.com/news/2013-10-09/carney-eyes-recovery-momentum-as-boe-seen-showing-united-front.html) 

I would personally read it as saying that the BOE is actually very cautious on its economic growth at the moment and that they will not increase interest rates with more allowance for further easing measures. This will be supported by the fact that recent data coming out of the UK is still shaky. (Industrial output & facorty production readings from yesterday)

I managed to get some profit from selling the GBP when it broke down of the second level of support, but maintaining caution as the market still seems uncertain on outcome from the US. However, for now, to follow the trend would be to continue selling.

UPDATED Trade; Latest on potential US govt shutdown threat; How should I play out this poker hand?

UPDATE of Trade position;

To find out the earlier part of the trade, read below:

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The latest developments in the political bickering between the Republicans and Democrats in the US is threatening to result in a government shutdown by September 30th, 2013, the end of the current fiscal year, which would mean that most of the services provided by the government will close down temporarily, barring some essential services ie, any federal program or agency which is tasked with protecting life & property, such as air traffic control and food inspection. (The latest on the political battle that caused this whole ruckus : http://edition.cnn.com/2013/09/20/politics/congress-spending-showdown/index.html). There is also the matter of raising the debt ceiling, which is also touched on in the article.

Apart from the obvious effects this would have on the US economy, such as uncertainty in the markets, which would hold off a lot of investment activity, which would eventually hit the jobs sector and consumer spending, there are many other negative effects which could spiral out of control.

"On the House floor on Friday, legislators warned of the serious consequences of a government shutdown. The last shutdown, which occurred during the Clinton administration more than 17 years ago, comprised a total of 28 days and cost the nation more than $1 billion, according to congressional researchers."

For more of the potential effects, read http://money.cnn.com/2013/09/23/news/economy/shutdown-economy/.

The effect of this matter on the financial markets is that traders have shown a tendency to discard the USD in favor of safe haven currencies, such as the JPY, as uncertainty dominates the markets.

Since last Thursday, I had a few short positions in the AUDUSD to take advantage of the realisation by traders that even with the weakness of the USD, the AUD is still overvalued, what more with the currency war on the table among all the major central banks of the world. Take a look at the chart below; my positions are indicated by the lines and the arrows

The previous rally in the AUDUSD was largely due to USD weakness because of the confusion in the run up to the announcement of the FOMC decision on the matter of taper or non taper of its current QE measures, however the latest developments in the US have thrown in new fundamental factors to consider in this position that I am holding.

Come Monday morning at the market open there could be a gap up in the AUDUSD, and I am considering whether I should fold on this hand; or should I be a little patient stay in the game, and wait for a chance to raise my stake in this round?

What do you think? Will this factor be a strong enough catalyst to reverse the AUDUSD latest minor sell off? The fact that this latest game of poker had extended itself to over the weekend, I am unable to do much but to come up with a plan to deal with the outcome come Monday morning market open.

FOMC announcement surprised me!!

So, there was no tapering announcement by the FOMC and they will continue their QE measures! Honestly, I was caught by surprise, but yet had also anticipated something going wrong unexpectedly (in the markets, it always happens), had a trading plan in mind and it worked!! Yes!

The pictures below are self explanatory; = )