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Currency Wars and Stimulus Speculation
Written by article default Monday, 11 October 2010 08:22
I have high expectations heading into this new trading week; but things are starting out relatively slow. The top event risk in my book over the weekend was the IMF and World Bank meetings which held side discussions with policy officials from around the world about exchange rate manipulation. Naturally, this protectionist position is rooted in economic policy for these nations; so they won't readily change their efforts. Therefore, the fact that there was no change in stance from any of the major players doesn't come as too much of a surprise. Ignoring this pink elephant to focus on the more pressing concern (stimulus expansion), we have already seen some interesting Fed commentary. Dudley spoke like a dove and Hoenig like a hawk. No surprise there. However, we would see Yellen offer a decidedly more hawkish tone by assessing the risks associated with excessive monetary profligacy. Does this definitely end the the call for stimulus expansion come November 3rd? No. But it does slightly tip the scales back to neutral.With a mind to the market's preoccupation with stimulus, I am watching EURUSD with intensified interest this week. The extremely consistent trend on a 60 and 240-minute charts has grown winded below 1.40. That doesn't mean the pair can't charge higher; but it does mean that there is better potential for reversal from here. This one is at the top of my watch list. Another immediately interesting pair is GBPUSD. Fed stimulus speculation is tangled with retail sales, housing price, trade and inflation data expected from the UK over the coming 24 hours. This pair is stalled at a long-term Fib and double top around 1.60; but there is also a rising trend channel that plants a floor at 1.5825. I like it to both sides depending on what the market is willing to go for. For active positions, I am still expressing along pound view with my short EURGBP. The technical channel made the uptrend stop; and now it is up to fundamentals to help with the reversal. We may see this pair reverse or breakout by tomorrow. A much short-term and highly speculative setup, I have also taken a reduced AUDCHF short position today from 0.95. My stop is set at 0.9555 and the first target is 0.94. That is a more generous risk / reward on an initual setup than I usually persue; but it is well within reason when we take it as a timed setup. This should play out quickly; or I will cut it.
As for potential beyond EURUSD and GBPUSD, I see opportunity with an eventual AUDUSD reversal. This has to be a play of momentum and fundametnals however, because the technicals aren't as consistent. USDCAD also has a relatively flat channel to work with that could set up a range reversal at 1.0050; but I will not be trading this setup (I am not a fan of USDCAD). From teh crosses, AUDJPY has setup congestion between 81.35 and 79.75 and could easily break with a good risk shift. GBPNZD is very attractive with a range low at 2.01 (for a breakdown or reversal scenario - just wait for confirmation). AUDCAD is still intersting for its double top and rising trend. EURNZD may even be good as an alternative view to the long I rode up until last week. A break of 1.8575 could open the door to a short-term reversal.
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