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M$PC Currency Update: Risk Rally Continues into North American Trade; Looking to Fade

Markets are showing signs of rebound in the early week and we had been warning of the possibility on Friday and Monday after technical studies were showing the need for some form of corrective price action. We had said that we envisioned some form of a positive fundamental catalyst that would ultimately inspire some short-term buying in risk before markets would ultimately once again relent to the broad risk off trade. The fundamental catalyst has indeed come and it is in the form of reports that EU officials are working on a detailed scheme to help restore a sense of confidence in the eurozone region. While we do not expect any of this renewed optimism to last, it is quite possible that the rally in risk continues for a few more sessions. Certainly, some better than expected European auction results and a solid German GfK confidence print have helped to sustain the risk on trade into the North American open.

This ultimately should translate into a lower US Dollar and higher currencies. With this in mind, the strategy over the coming sessions should be to wait and take shots at selling currencies and buying the buck on overextended intraday moves. Broader global macro stresses and uncertainty are still very legitimate and once any optimism from the latest prospective EU plan fades away, we should once again see a broad based liquidation of risk correlated assets and rally back into safe haven flows which benefit the buck.

We will look to break down some of the major currencies and offer our ideal sell levels for Tuesday trade in an effort to provide even more clarity. Please note however, should these entry levels be filled and show no follow through by the end of the day (5pm NY time), we recommend exiting the positions and looking for fresh opportunities on Wednesday. The following is a list of some of the more active currency pairs and ideal entry points for trades on Tuesday:

EUR/USD – Look to Sell at 1.3670
GBP/USD – Look to Sell at 1.5665
USD/CHF – Look to Buy at 0.8900
AUD/USD – Look to Sell at 0.9960
NZD/USD – Look to Sell at 0.7910

As far as the Yen is concerned, we continue to warn against the accumulation of additional Yen at current levels, and see this market at a serious risk for major weakness going forward, even in the event of additional strain on the global macro economy. Japanese officials have been actively warning of intervention, and the Bank of Japan has more than enough at its disposal to be able to buy a significant amount of US Dollars.

As such, just as we have already seen with the Franc, the Yen will also be at risk for a major sell-off should the current state of affairs continue (ie risk liquidation). We therefore hold firm in our broad based USD bullish outlook and continue to like the idea of looking to fade any additional Yen strength against the major currencies. At this point, we can offer no official entry points for the USD/JPY trade, but will let you know as soon as we see something that looks attractive.

Joel Kruger has over 10 years of experience in the currency markets in addition to his background in law. Blending fundamental and technical analysis, Joel’s reporting considers a variety of economic and financial cross-currents to give trader a comprehensive assessment of forex market activity. Joel covers the European and Asian market sessions for DailyFX.