Best Thread FXCM/DailyFX Signals and Strategies

[Jason Rogers]

Gold To Test Record-High As Investors Seek Alternative To US Dollar

Written by David Song of DailyFX.com

Fundamental Forecast for Gold: Bullish

Gold prices pushed back above $1400/oz in December as market participants diversified away from the U.S. dollar, and the bullion may push higher over the following week as investors look for an alternative to the reserve currency. The precious metal could certainly make another run at the record high of $1424/oz next week as the bearish sentiment underlying the greenback resurfaces, but a shift in market sentiment could lead gold to consolidate as the fundamental outlook for the world economy remains clouded with uncertainties.

According to a report by the Shanghai Gold Exchange, gold imports into China surged by nearly five-folds during the first 10-months of this year as investors attempt to hedge against rising inflation, and demands for the precious metal may accelerate further as world policy makers maintain a cautious outlook for the global recovery. As fears surrounding the European debt crisis continue to weigh on investor confidence, with South Korea pledging to retaliate against the North, instability in the world economy could push gold prices higher as risk sentiment continues to dictate price action in the financial markets. With gold maintaining the upward trend from earlier this year, the technical outlook favors a bullish bias for the precious metal, and prices may climb higher over the near-term as it continues to trade above the 50-Day moving average at $1356. However, the bearish divergence in the relative strength index could spark a short-term correction in the previous metal, and gold prices may consolidate in the days ahead as it approaches the record-high.

With the slew of central bank interest rate decisions scheduled for the following week, dovish comments from global policy makers could fuel increased demands for the bullion and lead prices to climb back to $1424/oz as the U.S. dollar’s safe-haven status comes under pressure. In turn, we should see gold maintain its upward trend throughout the remainder of the year, but a shift in market sentiment could spark increased volatility in gold prices as world leaders take unprecedented steps to restore investor confidence.

 

[Jason Rogers]

Australian Dollar Former Channel Support Now Possible Resistance

Written by Jamie Saettele of DailyFX.com

The AUDUSD rally from the low is sharp and has nearly reached 9950. A move above there would negate the series of lower highs but additional bearish counts are possible, including a leading diagonal and expanded flat as wave 2. Resistance is between 9950 and 10000.

 

[Jason Rogers]

British Pound Forecast to Strengthen Against Japanese Yen

SSI Weekly Sentiment Report from DailyFX.com

GBPJPY –The ratio of long to short positions in the GBPJPY stands at -4.51 as nearly 82% of traders are short. Yesterday, the ratio was at -5.85 as 85% of open positions were short. In detail, long positions are 9.4% higher than yesterday and 19.1% weaker since last week. Short positions are 15.7% lower than yesterday and 238.2% stronger since last week. Open interest is 12.0% weaker than yesterday and 37.9% above its monthly average. The SSI is a contrarian indicator and signals more GBPJPY gains.

 

[Jason Rogers]

U.S. Retail Sales Tops Expectations in November, FOMC Takes Center Stage

Written by Michael Wright, Currency Analyst at DailyFX.com

Advance retail sales in the world’s largest economy rose 0.8 percent in November after climbing a revised 0.8 percent the month prior, while retail sales less autos jumped 1.2 percent to mark the highest level since March. Subsequent to the report, the dollar rallied across most of its major counterparts, but the advance was short-lived as traders shift their focus to the FOMC rate decision.

Taking a look at the breakdown of the report, growth was led by apparel stores, gas stations, sporting goods, and non store retailers. Not to overlook, producer prices was released alongside retail sales. Annualized figures advanced 3.5 percent, topping forecasts’ of 3.3 percent. Producer prices are worth noting due to the fact that producers tend to pass on higher costs to consumers as higher retail prices. However, businesses may be reluctant to pass higher costs onto customers as the unemployment rate stands at its highest level since April.

Market participants will now shift their focus to the FOMC rate decision. As of late, traders are pricing in a zero percent chance that the Fed will raise borrowing costs 25 basis points later on today as the economy faces tight credit conditions, slow employment growth, and low consumer prices. As policy makers are likely to keep rates unchanged, comments trailing the rate decision are likely to dictate price action. The fed may adjust forecats for 2011 and 2012, while acknowledging 'improvement' in the economy.

The GBPUSD continues its northern journey after reversing course at November’s low of 1.5483. Price action now looks poised to test the 1.59 area in the short term as technical indicators point to additional gains. The MACD has yet to reverse after hinting at gains in early December, while the slow stochastic trends upward. So long as price action remains bounded by the ascending channel, upside risks remain. However, a break and a close 1.5750 may pave the way for a larger correction as the overall trend remains to the downside.

 

[Jason Rogers]

Top Forex Trading Ideas for 2011: John Kicklighter

Top Forex Trading Ideas for 2011

JOHN KICKLIGHTER
DailyFX.com Currency Strategist

Those that Stick Their Neck Out the Furthest
Short: GBP, EUR; Long: USD

Fiscal responsibility is a good policy when it comes to the long-term health of a market and economy. However, when you are one of a few players that are looking to reign in the support when the rest of the globe is nurturing a still-weak recovery; it is asking for trouble. We have seen both the UK and Eurozone make considerable strides to cut deficits and reduce the threat of burdensome budget as well as sovereign credit rating pressure. And, over the long-run, these efforts will very likely help the economies and stabilize their markets. On the other hand, what happens in the event of a near-term slump in risk appetite and a stagnant period of growth? Those policy authorities that pursued austerity will pay for their efforts by amplifying the weakness of their economies. For the UK, the record budget cut and plans to cut 500,000 government jobs will reflect what impact it has starting in the 4Q and 1Q GDP numbers. Once that effect is noted, the sensitivity to risk trends will be leveraged. For the Eurozone, the application of austerity measures to already weak members will likely push these economy’s deeper into recession and further into financial turmoil – eventually spelling contagion for the entire region.

This will lead both the Euro and British pound to meaningful declines. And, where will the capital go? Naturally, investors will seek liquidity; but they will also look for support. They will find it in the US dollar. This development only speaks to the first stage reaction. The pain will be amplified in those austere currencies for sure. Yet when underlying investor fears level off; the survival of these economies able to maintain a conservative fiscal position will put long-term investors on the hunt for European and British assets. Both of these developments are likely to happen within 2011; with the first phase likely to come before mid-year while the second will take place sometime in the third quarter. When that second phase occurs, we can reverse that position to short Dollars and long Euros and Pounds.

A Collapse of Government-Sponsored Risk Appetite
Short: EUR, AUD, NZD, S&P 500; Long: Gold, USD, CHF

In contrast to 2009’s consistent advance in speculative and growth-dependent assets, this past year’s performance was far more volatile. What was the difference between these two periods? In late 2009 and early 2009, the governments of the world rushed in to guarantee risky assets, buy up toxic assets and pump liquidity into the markets. This was a rush of relief for a market that seemed on the verge of collapse. And in the subsequent reprieve, tremendous amounts of capital that was transferred into the most liquid and low risk assets had to make its way back into the market. That recapitalization lasted through most of 2009; but in 2010 the markets were once again topped off. Fundamentals would again come into play; but the side effects of government stimulus lingered and helped maintain to sustain risky positioning. And, in fact, additional stimulus was pumped into the system to prevent a European crisis from spreading, the US falling back into recession and Japan from a permanent state of deflation. This stimulus can certainly have positive effects on growth; but the benefits of additional support are increasingly marginal. Eventually the markets will have to make a natural correction to account for the anemic outlook for employment, growth, earnings, dividends and every other meaningful measure of activity and return. When this day of reckoning does come, the governments will find they are already over-extended and won’t have the necessary resources to fight a collapse in sentiment that is already acclimated to stimulus. That will only increase conviction in the subsequent unwind – especially in those assets that have reaped the benefit of stimulus.
Among the rank that will be hardest hit are the high-yielding currencies (Australian and New Zealand dollars), the euro which has seen cracks in the support of its 750 billion euro rescue fund and the S&P 500 which has been inflated by Fed stimulus. On the other end of this development is the market’s most liquid asset (the US dollar), the euro’s principle counterpart (the Swiss franc), and the asset that is considered an alternative store of wealth (gold). For a time frame, this will most likely happen in the first half of the year; but it is difficult to say how much stimulus will be pumped in to temporarily hold up the house of cards.

 

[Jason Rogers]

Top Forex Trading Ideas for 2011

Top Forex Trading Ideas for 2011

DAVID RODRIGUEZ
Quantitative Strategist at DailyFX.com

Crises Aren’t Done Just Yet
Long: USD, Short: EUR

At the risk of sounding like a broken record, I believe that the US Dollar has set an important low against the Euro through the month of November. My belief is based primarily off of more quantitative measures such as Futures positioning and FX Options risk reversals. Yet below all of that remains a compelling fundamental argument for Euro weakness and US Dollar strength—the ongoing Euro Zone fiscal debt crisis.
When all is said and done, I see very little scope for material improvement in the Euro Zone’s debt issues. As measured by proportion of GDP, Euro Zone countries are among the most indebted among all industrialized nations. This means that the topic of interest rates and government bond yields is especially significant, and the ongoing crisis in confidence will only inflate EMU country debt further.

Clearly the US Dollar side of the equations is not without problems. Yet I hardly think that the EMU nations have the appetite to bailout further members in the foreseeable future—that which is a growing risk and may be only a matter of time. Thus I think we can continue to see the Euro decline against the US Dollar going into the New Year. It may be especially important to watch price action in the month of January, as this typically sets the pace for the remainder of the year.

 

[Jason Rogers]

Euro’s Financial Survival may be a Serious Question in 2011

Written by John Kicklighter of DailyFX.com

rice action can be misleading if you are simply looking for a reflection of a currency’s (and thereby the economy and market it represents) health via its relative level on the market. If we were working with a ‘pure’ or ‘efficient’ market, then the shared currency would seem to have steadied and even improved somewhat through the final two weeks of the trading year. However, we as traders know better. The speculative influence and capital flows behind these markets materially distorts the basic fundamental perspective of a currency (just look at the strength of the Japanese yen given the multi-decade deflation, credit and economic problems it is still facing). This is exactly the case for the euro through the final breaths of 2010. Thinned-out markets and necessary position changes seemed to put a bullish face on the otherwise pained currency. Heading into the new trading year, however, it is important that we not be lulled into passively accepting what policy makers or short-term speculative swings would lead us to believe. The market’s prevailing sense of ‘fair value’ for the euro is always correct; but objective fundamentals act as an anchor through the volatile swings. Eventually, the two are reconciled – and it is rarely the underlying and slow-to-develop fundamentals that make the change.

Though the fundamental forecast for the euro is bullish; this is more accurately an assessment for the month and perhaps the quarter. For the week ahead, we will still have to deal with the distortions of turnover associated with ending one trading year and moving on to the next. Half of the industrialized world’s banks will still be offline Monday; and more importantly, it will take a little time for funds, banks, central banks and speculators to establish their positioning for the New Year. There is a good chance that a meaningful trend can develop through some of the more significant underlying trends (the EU’s financial crisis, growth concerns, general risk appetite, etc); but in the absence of a definitive move, it will be worthwhile to keep track of short-tem volatility on scheduled event risk. It isn’t difficult to identify the importance of all the economic releases on the docket; but a few will certainly stand out. The first notable is German employment data. As the region’s power source, the German consumer will have to saddle a lot more of the region’s burden to lift the entire EU out of its troubles. The same day, the Euro Zone CPI figures are expected to put interest rate concerns back on the board. A 2.0 percent reading would put the reading at the ECB’s target; but pushing for rate hikes when many EU members can’t access the debt market would be exceptionally dangerous. Finally, the range of sentiment surveys should give a well-rounded assessment of what is expected from the most important aspects of the region’s health.

If we really want to get a sense of the euro’s future, we need to look beyond the data updates and liquidity issues. The European Union’s financial health has deteriorated significantly in the past weeks and months; and against the backdrop of relatively stable prices, the euro hasn’t nearly accounted for the added concern. Among the few developments threaten bigger problems, we have further sovereign debt downgrades, consumer deposit withdrawals, necessary debt raising (Spain and Italy require an estimated 400 billion euros worth through the spring and the ECB is tentatively having problems with sterilizing its stimulus effort. What is the real stimulus picture of Europe? It is generally accepted that the region is doing much better than the US, UK or Japan; but it is in fact in the same boat. What’s more, the imbalance in health between the major members and considerable pain some will have to suffer between recession and austerity could necessity a far more expansive welfare effort or a change in the group’s structure (perhaps raising acceptable debt levels). At this pace, more members may succumb to crises and stimulus is likely to run out before everyone has found their footing. – JK

 

[Jason Rogers]

US Dollar Strength to Continue on Crowd Sentiment

Written by David Rodriguez of DailyFX.com

Forex crowds have sold into recent US Dollar strength against the Euro, Japanese Yen, and British Pound—giving us contrarian signal that the Greenback may continue higher through short-term trade. Euro/US Dollar long positions jumped 35 percent since last week as the pair nears monthly lows, while US Dollar/Japanese Yen short positions have climbed 42 percent through the same period. We accordingly remain bullish, while forex futures and options sentiment likewise suggests that the US Dollar could see further near-term strength.

EURUSD – The ratio of long to short positions in the EURUSD stands at 1.10 as nearly 52% of traders are long. Yesterday, the ratio was at 1.02 as 51% of open positions were long. In detail, long positions are 9.7% higher than yesterday and 35.7% stronger since last week. Short positions are 1.8% higher than yesterday and 17.0% weaker since last week. Open interest is 5.8% stronger than yesterday and 0.4% above its monthly average. The slow but steady build in long positions gives us contrarian signal that the EURUSD may continue its declines through near-term trade.

 

[Jason Rogers]

ECB and BoE Likely to Force Major Moves in Week Ahead

Written by Alex Rodriguez, James Russell, and Christopher Vecchio of DailyFX.com

Federal Reserve
The Federal Open Market Committee left interest rates and monetary policy unchanged through its December 14 meeting, and expectations call for few policy changes in the months ahead. Citing low rates of resource utilization, subdued inflation trends, and stable inflation expectations for the foreseeable future, the FOMC found that its accodomodative stance remained appropriate. The Committee said that the recovery is continuing, but at a rate that has been insufficient to bring down unemployment; in addition, household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, weakened housing wealth, and tight credit conditions. FOMC officials accordingly intend to continue the planned $600 billion quantitative easing program into the second quarter of this year. The Committee will regularly review the program in light of incoming information and will adjust the program accordingly.

After declining over nine percent in the months leading up to the Fed's November meeting on QE2 speculation, the U.S. Dollar Index has rallied over six percent since. Much of the rally can be attributed to weakness in the Euro-zone, but also improving economic data in the U.S. Jobless claims, empire manufacturing, and industrial production beat expectations in recent months, while the housing market also appeared to stabilize. In addition, leading indicators gained by the most in 8 months in November, while a recent ADP report for December showed the biggest jump in company payrolls since records began in 2001. Should economic conditions and employment trends continue to move in a positive direction, the FOMC may reconsider their completion of QE2, which would provide a large boost to the U.S. Dollar. However, expectations for Fed tightening remain modest, as market swaps imply only a 38 basis point hike to the fed funds rate over the next 12 months. -JR


European Central Bank
The European Central Bank left its key short-term interest rate unchanged through its December 2 meeting, forcing little reaction from the Euro as few expect the bank to shift policy through the foreseeable future. Noting that “price developments [are expected] to remain moderate over the policy-relevant medium-term horizon,” the Governing Council found the 1.00 percent interest rateappropriate for the time being. In his remarks, President Trichet asserted that the European Central Bank’s monetary analysis “confirms that inflationary pressures over the medium term remain contained.” Given the non-standard measures enacted over the past year in order to enhance credit support, monetary policy will retain its ability to make acute adjustments at any time if necessary.

The economic recovery continued to find footing in the latter part of 2010, as evidenced by 0.4 percent growth in the third quarter—a marked improvement over GDP growth in the second quarter at a meager 0.1 percent. Given the “recent statistical releases,” President Trichet noted, “the positive underlying momentum of the economic recovery in the Euro area remains in place…this implies ongoing real GDP growth in the fourth quarter of [2010].” Ignoring the underlying economic statistics, the European Central Bank might be forced to alter its monetary policy going forward should problems rooted in the sovereign debt crisis arise. Should additional European countries, such as a Portugal and Spain, require bailout funds, there is some doubt that the European Central Bank could support the burden of another rescue; accordingly, rates could drop in order to facilitate the necessary expansionary credit policies to support such actions. Looking ahead to the next meeting, on January 13, 2011, the European Central Bank is expected to leave the benchmark rate on hold for the 21st consecutive month. Yet markets will pay especially close attention to any news of fresh sovereign debt purchases and the ECB’s efforts in containing the fallout from the ongoing crises.-CV


Bank of England
The Bank of England left its key interest rate unchanged at record-lows of 0.5 percent through its December 9 announcement and left its asset purchases program unchanged £200 billion. The recovery still continues to find footing in Britain, with the annualized third quarter GDP rate at 2.8 percent. The unemployment rate continues to linger just below 8 percent, a good sign considering that the labor market took a beating during the recession. The Bank of England noted that, while currently, such problems have yet to have an effect on the British market, there exists the possibility that “a prolonged period of financial market tensions” spilling over from the Euro-zone might have an effect on British domestic demand. Such distress may have already set itself upon England, as exports decreased in the third quarter to 2.2 percent growth after increasing by 3.1 percent in the second quarter. Similarly, industrial production contracted by 0.2 percent in October after rising by 0.4 percent in September. All in all, the British Trade Balance deficit continued to widen, falling to -£3.946 billion in October from -£3.79 billion in September.

Looking ahead, the main bank rate is likely to be left unchanged at 0.5 percent. Unemployment is expected to persist at 7.7 percent for the first half of 2011, while GDP growth is expected in a band of 2.75 percent to 2.9 percent for the first two quarters. Underlying price pressure is expected to increase as the year progresses, at around 3.35 percent for the first half of 2011. Despite no change forecasted after the January 13, 2011 meeting, with an implied bank rate of 0.85 percent in March 2011, rate hikes could be expected in the near-future if the recovery continues along its current path as the economy continues to heat-up. -CV

 

[Jason Rogers]

Euro Forecast to Fall Further amidst Euro Zone Fiscal Crises

Euro Forecast to Fall Further amidst Euro Zone Fiscal Crises

Written by David Rodriguez of DailyFX.com

The Euro fell sharply against the US Dollar in the year’s first week of trading, setting the stage for a negative month of January and potentially further losses through 2011. The first week of the month tends to set the pace for the following weeks, and the first month of the year predicts February-December performance with impressive accuracy. Fundamental arguments for euro weakness abound, but the mere fact that it has started the year on such a weak note bodes poorly for medium-to-long-term forecasts. A busy week of economic event risk likewise promises noteworthy volatility in the days ahead.

Disappointing sovereign bond auctions and generally disappointing news out of the European Monetary Union forced considerable Euro weakness, and overall momentum favors continued EURUSD declines into the coming week’s trade. Portugal was forced to pay a significant yield premium on a six-month bond auction, and Portugal-Germany yield spreads nearly hit fresh record-highs amidst the ensuing market tensions. The European Commission likewise forced further stresses when they sad that investors may need to shoulder part of the burden in future domestic bailouts. And though their recommendations would take years to implement, the mere suggestion was enough to show that appetite for further bailouts had waned significantly through recent events.

It is increasingly becoming a question of ‘when’—not ‘if’—a country such as Portugal is forced to take financial assistance amidst poor demand for its fresh debt issuance. Just recently the Swiss National Bank announced it was no longer accepting Irish and Portuguese bonds as collateral for lending. If domestic central banks are no longer willing to accept Euro Zone periphery debt, it underlines why private investors may likewise shun risky investments. It will be exceedingly difficult for the Euro to post any sort of significant rally against major counterparts amidst such worries over the solvency of individual member states.

The DailyFX Team has largely called for Euro weakness into 2011, and the first week of sharp declines certainly supports that hypothesis. It will be critical to monitor any and all developments through the ongoing fiscal crises, and recent developments suggest little material improvement is likely. Though this hardly guarantees that the EURUSD will decline through short-term trade, we remain overall bearish and expect further declines through January and potentially the rest of the year. - DR

 

[Jason Rogers]

AUD/USD’s Converging Trend Lines Presents Scalping Opportunity

Written by DailyFX.com Analyst John Rivera

The AUD/USD is finding a bid as better than expected results from the Portuguese bond auction has eased concerns over the European debt crisis. European leaders have started to intensify their efforts to stem the region’s issues which are being reinforced by support from the global community. Commodity prices have pushed higher for a third day which is also providing support for the high yielder. However, the domestic picture continues to dim as the Queensland continues to grapple with severe flooding which has dampened the outlook for tightening from the RBA. The opposing forces could leave the Aussie directionless providing a short-term scalping opportunity.

A five month rising trend line is providing significant support for the AUD/USD and could limit downside risks. The 100-Day SMA resides just below at 0.9734 and is reinforcing the barrier and potentially slow bearish momentum. Indeed, we can see this with recent price action as a rising wedge has developed which is providing target level for traders to enter and exit positions. However, that formation is up against a short-term descending trend line which could lead to increasing consolidation and an environment for high frequency traders to operate.

 

[Jason Rogers]

EUR/USD: Trading the European Central Bank Interest Rate Decision

Why Is This Event Important:

The euro is likely to face increased volatility over the next 24 hours of trading as the European Central Bank is scheduled to announce its interest rate decision on Thursday at 12:45 GMT, and the central bank is widely expected to maintain a dovish outlook for future policy as the region faces an uneven recovery. However, as Spain and Italy plan to tap the bond market tomorrow, the results of the debt auction could overshadow the rate decision as the risk for contagion intensifies.

What’s Expected:

Time of release: 01/13/2011 12:45 GMT, 7:45 EST

Primary Pair Impact : EURUSD

Expected: 1.00%

Previous: 1.00%

DailyFX Forecast: 1.00%​

Will This Be Market Moving (Scenarios):
A Bloomberg News survey shows all of the 53 economists polled forecast the Governing to hold the benchmark interest rate at 1.00%, but the market may show a muted reaction to the announcement as ECB President Trichet is scheduled to announce the policy statement at the press conference beginning at 13:30 GMT. The central bank head may attempt to talk down the risk for contagion as the sovereign debt crisis continues to weigh on investor confidence, but comments from the central bank head may fail to lift sprits as market participants speculate Spain and Portugal to share Ireland’s ill fate.

The Upside
Consumer prices in the Euro-Zone jumped to an annualized 2.2% in December to mark the fastest pace of growth since October 2008, and the rebound in inflation could lead the ECB to drop its dovish tone as it maintains its one and only mandate to ensure price stability. In turn, an upward shift in the central bank’s economic assessment could fuel the recent rally in the euro, and the EUR/USD may continue to retrace the sharp decline from earlier this year as European policy makers hold an enhanced outlook for the region.

The Downside
The final GDP report for the euro-area showed economic activity increased 0.3% in the third-quarter amid an initial forecast for a 0.4% expansion, while business investments unexpectedly slipped 0.3% after rising 2.0% during the previous period. As the private sector remains weak, with unemployment holding at a record high, the ECB may show an increased willingness to delay its exit strategy further, and dovish comments from the central bank could lead the EUR/USD to retrace the rebound from earlier this week as interest rate expectations falter.

How To Trade This Event Risk
As the ECB releases its policy statement half an hour after its interest rate announcement, trading this event is certainly not as clear cut as some of our previous trades, but comments from the central bank could set the stage for a long euro trade as European policy makers aim to restore investor confidence. Therefore, if the ECB raises its economic outlook and sets a clear timeline of when it will implement its exit strategy, we will need to see a green, five-minute candle following the statement to generate a buy entry on two-lots of EUR/USD. Once these conditions are met, we will set the initial stop at the nearby swing low or a reasonable distance after taking market volatility into account, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its mark in order to preserve our profits.

In contrast, the ECB may hold a cautious outlook for the region as the tough austerity measures bear down on economic recovery, and the central bank may continue to talk down the risks for inflation as it expects the ongoing slack within the private sector to drag on price growth. As a result, if the ECB holds a highly dovish tone for future policy, we will utilize the same setup for a short euro-dollar trade as the long position mentioned above, just in reverse.

 

[Jason Rogers]

Euro Forecast to Rally Further Against US Dollar

Written by David Rodriguez of DailyFX.com

Sharp US Dollar declines have encouraged aggressive crowd selling, giving contrarian signal to sell the Greenback through short-term trade. Last week we claimed that the US currency could continue higher amidst the opposite sentiment extremes, but market conditions can change rapidly and the Euro’s break above 1.3000 triggered the exact opposite signal. As it stands, our contrarian Speculative Sentiment Index suggests that the USD could continue lower against the Euro, British Pound, Swiss Franc, and Canadian Dollar through short-term trade. Forex futures and options sentiment similarly warned of potential EURUSD rallies amidst a sharp sentiment shift.

EURUSD – The ratio of long to short positions in the EURUSD stands at -1.71 as nearly 64% of traders are short. Yesterday, the ratio was at -1.30 as 56% of open positions were short. In detail, long positions are 15.7% lower than yesterday and 32.8% weaker since last week. Short positions are 15.4% higher than yesterday and 55.2% stronger since last week. Open interest is 1.9% stronger than yesterday and 8.2% above its monthly average. The SSI is a contrarian indicator and signals more EURUSD gains.

 

[Jason Rogers]

Gold Moves Lower in Listless Trade

Written by Ilya Spivak of DailyFX.com

Commentary: Gold fell $14.07, or 1.01%, to settle at $1373.78. Here is an excerpt from our latest Gold – FOREX Correlations report:

“Taking a look at gold specifically, prices have so far been successful in holding an initial support level near $1360. The metal’s fundamental underpinnings remain intact, as monetary policy remains extremely loose and investor interest remains high. Some cracks may be beginning to form in the bull thesis; however, as indications are that monetary conditions may begin to tighten later this year. Officials from both the ECB and BOE have begun to acknowledge inflation risks. Market-based interest rate expectations have risen in response, with traders anticipating two to three hikes from the central banks this year.

On the other hand, the Fed has shown no inclination to tighten policy anytime soon as it remains fully committed to carrying out its $600 billion quantitative easing program over the next two quarters. Additionally, even when monetary conditions were much tighter prior to the 2008 economic downturn, gold was steadily advancing. In fact, gold has risen for ten straight years, thorough boom and bust. The catalyst has been a surge in investment demand for the metal. To spur a meaningful downturn in prices, investment demand must soften. Why would higher interest rates or the prospect of higher interest rates have an impact now when they had no impact in the past? We are wary of taking any intermediate or longer-term bearish positions in gold until there is evidence that investor interest is waning.”

Technical Outlook: Prices put in a Bearish Engulfing candlestick pattern below resistance at $1388.38, the 50% Fibonacci retracement of the 1/3-1/7 downswing, hinting the corrective upswing has run out of steam and opening the door for renewed selling. However, confirmation of a downward reversal requires a daily close below support at a rising trend line set from late October, now at $1366.62. Near-term support stands at $1379.96, the 38.2% Fib.

 

[Jason Rogers]

Australian Dollar Begins 3rd Wave Decline

Prepared by Jamie Saettele of DailyFX.com

The AUDUSD rally from 9804 is a textbook 3 wave correction that follows a 5 wave decline. Waves a and c are equal in size and the advance reversed just short of the 61.8% retracement (of the decline from 10257). Looking out, a break below 9803 would shift focus to the December low at 9537, the 161.8% extension at 9344, and the August high at 9221.

 

[Jason Rogers]

Violently Oversold Monthly Studies Are Too Compelling to Ignore

DailyFX Top Forex Trading Ideas for 2011

JOEL KRUGER
Technical Strategist


We have warned that we see risks for significant downside in the Australian Dollar over the coming months, with the single currency trading by record highs and looking very stretched on a cyclical basis. All of the fundamental drivers of the Aussie strength look to be approaching exhaustion and we believe that things will not be sustainable from here. RBA monetary policy has been extremely aggressive in the face of a global slowdown to produce attractive yield differentials, while booming commodity prices and a flourishing Chinese economy have also helped to propel the antipodean. However, at this point, the RBA is already starting to slow down with its tightening bias, while other central banks are starting to play catch up. At the same time, commodities prices are looking quite overdone and show plenty of room for a sizeable corrective pullback, while the latest Chinese measures to curb inflation, will likely weigh on the China dependent Australian economy.

With this in mind, we recommend a short Aussie position into 2011 via the Euro. We have chosen to short the Aussie through the Euro instead of the Dollar as we believe it is a safer play from here and also could offer a more attractive risk/reward. The cross sits at 20 year lows and by the bottom of a major range. Monthly studies are severely oversold (very rare) with the RSI by 25 and in desperate need of a healthy bounce. Up to this point, the Eur/Aud cross has been somewhat inversely correlated to Eur/Usd, particularly in periods of Eur/Usd strength. When the Euro rises, markets have taken this as a risk positive and the higher yielding Aussie then rallies even more on the favorable yield differentials. Meanwhile, when the Eur/Usd sells off, the markets have been inclined to take this as a risk negative and in turn look to liquidate the higher yielding Aussie more aggressively. But moving forward, we see the Australian Dollar at risk even in the event of more broad based USD depreciation. The basis for our argument is that with the Australian economic data finally starting to show a dent in its armor, the attractive yield differential in periods of USD weakness will no longer be quite as attractive, with market participants starting to price in a slowdown in the local economy.

 

[Jason Rogers]

Shorting the Pacific Rim in 2011

Written by Jamie Saettele of DailyFX.com

I find that the best trade ideas are the ones that aren’t yet attached to a story. For example, not many wanted to sell the EURUSD at 16000. The same might be said in 2011 for selling Yen, Australian, and New Zealand dollars (especially AUDUSD and NZDUSD). It is fun to speculate on what the story could be though. Perhaps China’s authoritative ways will lead to increased uncertainty on the Pacific Rim…or maybe Australia’s housing market will collapse…or maybe all of the above. Let’s see what the charts say.

Yen Futures and TLT (iShares 20+ Yr Treas. Bond) ETF Daily Bars

It’s no secret that the Yen and US debt have traded in tandem, especially over the last several years. The Yen led debt at bottoms in April 2009 and April 2010 and debt led the Yen at tops in October 2009 and August 2010. The decline in debt from the August top is impulsive (5 waves), which indicates a significant change in trend. Allowing for a corrective setback, the TLT (and long term US debt) is in a bearish situation. Assuming that the current relationship holds (and relationships can certainly change), the bulk of Yen weakness has yet to occur (USDJPY bullish).

US Dollar / Japanese Yen Monthly Bars

I think I’ve shown this chart several times each year since 2007 (when wave 4 triangle ended). The implications had always been for the USDJPY to register a new all-time low before reversing. Now, it seems unlikely that the large 5th wave is complete after just 3 years but RSI divergence and the recent bullish engulfing pattern (October and November candles) suggest a relief bounce at minimum. 8800 is the next level of chart resistance (meets the trendline in March/April 2011). Given the potential for a short term rally in debt (corrective rally after the 5 wave decline), the Yen could see one more surge (USDJPY decline). As such, I favor buying a USDJPY decline. Keep in mind that the decline might test or result in a drop below the previous low of 8024.

 

[Jason Rogers]

Strategy Outlook: Volatility Likely, Fast-Moving Strategies Favored in Days Ahead

Market Conditions Summary
Written by DailyFX Analyst David Rodriguez

Choppy but volatile trading conditions suggest that fast-moving Breakout systems and slower-moving Range strategies may do well in what promises to be an exciting week of price action.

A jump in volatility expectations ahead of the first week of February trading promises similarly eventful price action in the week ahead. The question on everyone’s mind is relatively simple: does the US Dollar stand a real chance at reversal or will it finally break down against the euro and other key counterparts? Such indecision will likely make for sharp intraday moves—especially with top-tier economic event risk out of the US and other major economies.

As far as our DailyFX+ trading signals are concerned, we continue to favor systems that are likely to latch on to very short-term shifts in price momentum. This past week we saw Breakout systems perform especially well on fast-moving Japanese Yen pairs, and we would expect similar outperformance on similar price action in the days ahead.

 

[Jason Rogers]

Euro Drops Sharply – Targets 13570

Prepared by DailyFX Analyst Jamie Saettele

I wrote yesterday that “I expect a top as per the presented wave count but this is as far as the EURUSD can go with this count remaining favored.” The EURUSD has finally dropped sharply, having broken below its c wave channel. Focus is now on the weekly low (Monday) at 13570. If this is indeed a 3rd wave decline at multiple degrees of trend, then the severity of the drop will be breathtaking.

 

[Jason Rogers]

Euro Decline May Accelerate

Prepared by DailyFX.com Analyst Jamie Saettele

EUR/USD 60 Minute Bars

The EURUSD has reached its 20 day average and the next level of potential support is former resistance at 13456. However, short term wave structure indicates the potential for a sharp decline in a small 3rd wave as long as price remains below 13627. Near term objectives are Fibonacci extensions at 13308 (100%) and 13112 (161.8%). Former support at 13244 is also of interest. If pop above 13627 would probably complete a flat (resistance would be 13678).