Best Thread FXCM/DailyFX Signals and Strategies

[Jason Rogers]

Greetings everyone, this will be the last post on this thread for the remainder of 2011, and we will resume normal posting the first week of January 2012. DailyFX and FXCM wish you a happy holiday, and here's an article written by the DailyFX analysts pointing out their top forex trading mistakes of 2011 so we can improve on our trading for next year.


DailyFX’s Top Forex Trading Mistakes of 2011

The end of the year, is a good time to look back and take stock of our winners and losers. Recounting the winners may make us feel good; but it is a critical review of the badly conceived and executed trades where we garner the most value. The following are the top trading mistakes the DailyFX analysts feel they made over the course of 2011.


Jamie Saettele, Senior Technical Strategist - Countering Human Bias
I rely on technical information (based on price and time) in an effort to view markets through an objective lens. Early month ranges (high/low tendencies at beginning of the month) and key reversals are two cornerstones of my strategy and I ignored them at critical points in time. My mistakes were ignoring the key reversals on August 9th and October 4th. The latter reversal also occurred on the second day of the month, making the signal stronger. I was bearish and unwilling to change since I was convinced of a 2008 type collapse.

Interestingly enough, I turned bullish in my commentary. I wrote on August 9th (day after the low) that "having found support from a line that extends off of the December 2010 and March 2011 lows, the AUDUSD could see a sharp snapback rally” and on October 5th (day after the low) that “short term structure is constructive, with the rally from the low unfolding in 5 waves. I favor buying dips.” Even so, I didn’t go long! These experiences highlight obstacles, specifically inherent bias, that humans face in speculation. Conservatism bias, in which one gives too little weight to new information and confirmation bias, which leads us to accept information that confirms our bias, explains my failure to go long in August and October. It is impossible to completely eliminate bias from the human mind but one can limit bias and its influence on the bottom line by strict adherence to a technical, rules based approach.


John Kicklighter, Chief Currency Strategist - Trade with My Convictions, Don’t Trade My Convictions
It may not seem that there is any difference in ‘trading your convictions’ and ‘trading with your convictions’; but I have learned this past year that there is a very important distinction. You may think the markets are insane for fighting a clear fundamental / technical trend, policy officials are pushing forward damaging and impractical agendas, or that volatility simply defies reality. These all may be true; but if the market is willing to run with it, trading against the prevailing current will lead you to losses regardless. We should absolutely have our convictions based on sound analysis (technical and/or fundamental); but I have learned you don’t move ‘all in’ on those beliefs until it is clear that the market consensus is on the same page.

A recent example of this learned experience was my attempt to short AUDNZD in November under the believe that the preceding rally from September lows contradicted the building bearish pressure that follows in the wake of the RBA’s shift to interest rate cuts. As a pair made up of two high yield currencies, the standard risk influence seemed to be neutralized and the isolation of comparative rates seemed to be straightforward. I jumped a little too early on an unconfirmed channel break; and the market promptly made me pay for it with a sharp reversal back within the advancing congestion pattern. The outlook for Australian rates may be lower; but the market proved that it is still impressed with the yield advantage the currency enjoys over its New Zealand counterpart. This may change in the future; but for now, my convictions don’t fit the trend.

In practical application, I now actively correct this mistake this by trading smaller size and for more proximate targets when trading a trend that goes against my convictions. I’ll boost the position size and push out my objectives when market and bias align. Following this approach through 2011 would have saved me a lot of pain with my expectations for risk trends to fall apart under the pressure of a global growth issues, excessive leverage in the markets and financial troubles.


David Rodriguez, Quantitative Strategist - Sometimes, Popular Thinking is Correct
If you’ve read any of my work you likely know that I’m always talking about the FXCM Speculative Sentiment Index and using it in my trading. I think it’s the best single indicator we use on DailyFX.com and I’ve spent years watching it produce good trading ideas. Of course, it isn’t without its flaws by any means. The SSI shows us how retail traders are positioned, and we use it as a contrarian indicator. That is to say, if everyone’s long we often go short and vice versa. When does this not work?

Sometimes, the crowd is right. Throughout the month of October, I placed a number of profitable trades as I bought the Japanese Yen against the US Dollar, Australian Dollar, and British Pound. Why? Our SSI showed that crowds were aggressively short the JPY (long the AUDJPY, GBPJPY, USDJPY) and I wanted to be on the opposite end of the trade.

Sentiment hit major extremes when USDJPY SSI showed the number of traders long exceeded those short by nearly 20 to 1. Many traders were taking positions on the assumption that the Bank of Japan and/or Ministry of Finance would intervene and send the USDJPY sharply higher. Of course, I stayed dogged in my conviction that the crowd is always wrong. The rest was history. I was short the USDJPY and GBPJPY into the weekend. When I opened my trading station on Sunday, I saw that I’d been stopped out hundreds of pips above where I had placed my stop loss.

Trading against the crowd has generally served me well. But even at the time, colleagues were warning me of risks of a Japanese FX intervention. The crowd was right, and it hurt my account to the tune of two months’ worth of profits.


Joel Kruger, Currency Strategist - Remember to Know What Kind of Trader You Are Before Taking Positions
It was summer time and the opportunity had finally presented itself and I was ready to take full advantage. USD/CHF had been dropping dramatically into July, with the market easily tracking into unchartered territory by fresh record lows. I had been warning of the potential downside acceleration for some time, but had also been excitedly waiting for an opportunity to fade the weakness in anticipation of what I believed to be the formation of a major longer-term base. With the market dropping below 0.7500, I was ready to start to build my counter-trend long position. However, what type of risk would I assign the trade and how would I manage this very rare set-up?

I entered the position into a very oversold market and kind of committed myself to a grey area where I would not be short-term with my view, but at the same time would allow myself opportunity to hang on to the position in the event that it moved a few hundred points against me. But this strategy was not a good one, as it committed me to more uncertainty than I ever could have wished for and left me with a significant stop out of some 3.5% of my equity. Even more painful, was what ensued, with the market reversing course violently as I had anticipated, but with me out of the money, on the sidelines and psychologically damaged.

The important take away from this experience is that we should all know what type of trader we are before entering a position. If we are short-term with short term expectations, then we should commit to that strategy and look to be in and out of the position within a tight time-frame. However, if we are long-term in our view, then we should assign appropriate risk, leverage accordingly and be prepared to stay the course. In the above example, I had been looking for the formation of a long-term base and was fully aware that the end of a trend can often be the most violent time. In retrospect, I should have taken an even smaller position size and dug into the trenches to allow myself the opportunity of benefiting from such a rare and unique set-up.

At the end of the day, knowing exactly who you are and what your game plan is ahead of your position will give you the necessary peace of mind to think more clearly during the trade and leave a whole lot less room for any kind of doubt. Short-term traders should find comfort in the fact that they are not looking to hit home runs, and should be in the position for the singles, while long-term traders should recognize the need for room with their positions (not assigning more risk to trade, just allowing more room) and know to stay the course and not exit when the trade shows the first sign of profit.


Ilya Spivak, Currency Strategist - No Single Trading Strategy – Even a Good One – is really Sufficient
It is quite normal for seasoned short- to medium-term traders to have a “portfolio” of trading strategies to be used depending on market conditions. Indeed, if one’s time horizon for a given trade is several days to several weeks, it is perfectly reasonable to suspect that a variety of trading environments will require a diverse toolbox of ways to capitalize. As a longer-term trader focusing on macro-level global trends however, I’d been spared having to learn such flexibility. Using very low leverage and wide stops, I was previously able to sit through shorter-term oscillations until major trends reasserted themselves, yielding the longer-term moves I was looking for.

This year proved to be an important wake-up call as I became convinced by the spring that the Euro would succumb to debt crisis fears again and started actively selling EURUSD. The pair was both extraordinarily volatile and virtually directionless for close to four months, repeatedly pulling me into large-scale short positions only to lose momentum en route to my target and reverse sharply in the wrong direction to trip my stop-loss. It took a very uncomfortable number of such experiences to finally push me to go back to the drawing board and rethink my strategy. I widened my stops to accept a 1:1 risk/reward ratio, paying for it by sharply reducing position size, and introduced multiple layers of target levels to try and make the most of choppy markets. Thankfully, the money I lost along the way went to pay for a bit of education: no single strategy, regardless of its parameters, is ever really good enough.


David Song, Currency Analyst - Don’t Jump the Gun
After going through the 2011 trade log, I’ve had my ups and downs throughout the year, and one rule of thumb that became increasingly important was not to jump the gun. With the major price swings over the last 12 months, it was easy to get caught up in chasing trades, but prudently waiting for clear confirmation can help avoid being on the wrong side of the market. Of course, coming up with a solid trading strategy and sticking with your bias is important, but timing is crucial for a successful trade.

One currency pair that immediately comes to mind is the EUR/CAD. Although I was fairly bullish on the euro-loonie, I had a pretty good streak playing the range-bound price action in the exchange rate. However, there was a few times where I jumped in way too early. It came to a point where I was trying to anticipate the top/bottom, which would often lead to a losing trade. It became apparent that I was jumping the gun on my trade setups, and was so inclined to catch the entire range that I kept making the same mistake over and over.

Following a string of bad trades, I pushed myself to the sidelines to figure out where things were going wrong. It’s certainly difficult to hold down your emotions when we see volatility pick up, but I’ve become increasingly prudent following these experiences, and have come to terms that I should wait for clear confirmation when there are large swings in the exchange rate. Although this rule of thumb is talked about frequently, putting it into practice is certainly easier said than done, and it’s easy to overlook this guideline when we see large moves in the exchange rate.


Michael Boutros, Currency Analyst - As Markets Turn Fickle, You Must Remain Nimble
2011 has been a year marked by massive swings and increased volatility in the FX markets as a host of factors pushed rates back and forth. While this type of volatility is ideal for short-term technical trade strategies, there were times this year when my performance was compromised due to a single and seemingly obvious mistake.

Having a bias on your trade is of extreme importance and you may have often heard me advocating developing your own bias and sticking to it. However this does not imply that one should simply stick to his guns and be unwavering with regards to their trades. Indeed if anything can be taken away from our trades this year it’s that when focusing on short-term trade setups and scalps, remaining flexible with your bias and nimble with your trades is the key to longevity when focusing on intra-day trades.

In today’s market place news headlines and circulating rumors can cloud your judgment as you try to filter through the endless barrage of remarks and opinions. In early October markets had turned increasingly bearish on the state of global trade as concerns over an imminent default in Europe weighed on broader market sentiment. Fueling the rally were hopes of a comprehensive aid package ahead of an EU summit that would shore up banks and avert a default in the periphery nations. Although the actions taken were not a solution to the longer-term solvency issue facing the region, markets rallied on the hopes of salvation for the euro-project. I continued to short the euro and the aussie for some time despite the rally in risk under the pretense that these measures would do little to address the underlying problems of lack of competitiveness and deficit spending. Obviously, the results were dozens of drawdowns on scalps as I held my bias in what I considered to be routed in the fundamentals.

Reflecting back, it’s important to remember that it’s not our job to decide policy or put forth economic projections, but rather to trade them. Putting it simply, even though the EU had done little to address the long-term sustainability of the region, markets reacted favorably. When concentrating on playing technical intra-day swings it’s our job to judge and ride these shifts in sentiment, even if the underlying metrics may suggest otherwise. That said, it’s still of the utmost importance to develop an underlying bias on the pair to guide your scalps and medium-term trades. However when markets are clearly showing conviction on a move, Don’t Fight It. Although the fundamentals will always catch up in the end, in the interim, it’s important to respond and trade what the markets is telling you- Not the other way around.


Christopher Vecchio, Currency Analyst - Buy the Rumor, Sell the News
If you ask a new trader what the most important aspect of trading is, they are likely to tell you, “making money.” That’s incorrect, however. The most important aspect of trading, if you were to ask any seasoned trader, would be “capital preservation.” There are many methods to go about this: limit leverage, only trade during liquid hours, among others.

Unfortunately, none of these ways of trading the market take into account some of the fundamental pressures that might appear seemingly out of thin air. My top trading mistake of 2011 would thus be: don’t fight short-term trend changes, especially if they are predicated around actions (or rumors) by/of central banks or governments intervening in markets to ensure “stability”. Considering policy actions are usually well-telegraphed, this seems like an easy enough rule to follow. However, I can think of two specific occasions in 2011 in which I ignored this simple rule, leading to unnecessarily large draw-downs in my account.

The first of my two mistakes occurred in mid-August. Thomas Jordan, a Vice President of the Swiss National Bank, announced that the SNB was particularly concerned with the strength of the Swiss Franc versus the Euro. Indeed, the pair had fallen from near 1.2500 to start the year to within 70-pips of parity by the second week of August. I had been building in a heavy short position from net 1.0800, and the move towards 1.0000 was a welcomed development. However, when Mr. Jordan discussed the possibility of a EUR/CHF peg, I scoffed at the idea, foolishly. With my stops moved up to take ½ off at some profit (1.0600) and leave the other ½ on with a stop at 1.1200, I ended up missing out on hundreds of pips and then losing some, because I didn’t respect the gravity of the situation.

Unfortunately, this was not the only time I ignored policymakers in the past few months. On October 4, Euro-zone finance ministers hinted that a comprehensive package was going to be put together by the end of October. I didn’t think this was true, and that ultimately, the market would reject anything short of fiscal union. This became true, though not on October 4, but on October 31. Again, instead of taking the fundamental insight into consideration, I ignored the shift in trend and maintained my belief that markets were destined to fall, leading to another draw-down in my account.
Overall, I believe the big picture to take away here is not to discount the profound effect a fundamental event – be it data, news, rumors or speeches – can have on the market, permanently altering the technical picture in the short-term. Getting on momentum’s side during protracted moves can be beneficial, regardless of one’s bias.

 

[Jason Rogers]

Crude Oil May Break with Broader Trends as US - Iran Tensions Mount

Written by Ilya Spivak of DailyFX.com

Crude oil prices followed shares higher as expected yesterday on the back of a broad-based recovery in risk appetite. This time around, a pullback appears likely as S&P 500 stock index futures trade lower in early European trade, suggesting sentiment is souring anew. Investors’ anxiety comes as Eurozone debt crisis fears creep back into focus ahead of a pair bond auctions in Germany and Portugal. Later in the day, the spotlight will shift to US Factory Orders figures, which may prove to counter-balance selling pressure as expectations of the strongest increase since July.

Geopolitical jitters continue to provide the backdrop and may see crude decouple from sentiment trends amid continued jostling between the US and Iran, which traders fear may disrupt supply flows through the Strait of Hormuz that serves as the shipping route for close to 40 percent of seaborne crude. The latest development saw the Pentagon rebuff Iranian warnings not to return an aircraft carrier into the Persian Gulf after it left last week, saying “regularly scheduled movements” – including through the Strait of Hormuz – will continue as they have for decades.

On the technical front, prices rebounded as we suggested last weekafter putting in a Hammer candlestick above resistance-turned-support at thetop of a falling channel set from mid-November. The bulls took out interim resistance at challenge the November 17 high at 103.35, with a break above this barrier marking a material shift in tone from an outright bearish bias toward a more neutral one. Continued gains above resistance expose 106.05. Near-term support lines up at 101.28.

 

[Jason Rogers]

Euro Forecast to Fall to Fresh Lows

Written by David Rodriguez of DailyFX.com

EURUSD – Forex trading crowds have bought aggressively into Euro/US Dollar losses, giving contrarian signal that the pair could hit further lows. The Euro’s break of key support at the psychologically significant $1.30 mark and previous lows of $1.2850 opens up much larger declines. Yet we warn of getting aggressively short Euro as large speculators are their most bearish EURUSD in history.

The ratio of long to short positions in the EURUSD stands at 1.69 as nearly 63% of traders are long. This is a noteworthy shift from yesterday when the ratio was at 1.25 and 56% of open positions were long. In detail, long positions are 19.0% higher than yesterday and 23.7% stronger since last week. Short positions are 12.0% lower than yesterday and 20.2% weaker since last week

When retail trading crowds are long and continue growing further net-long, we often see subsequent EURUSD declines.

 

[Jason Rogers]

Fed Struggles To Meet On Common Ground, FOMC To Preserve Policy

Written by David Song and Trang Nguyen of DailyFX.com

THE TAKEAWAY: Boston Fed Pushes For Discount Rate Cut > Kansas City Vote To Raise > Growing Rift Amongst Fed Officials

According to the Fed minutes, the statement revealed that the board of directors at the Boston Fed called for a quarter-percentage point discount-rate cut to 0.5 percent in light of the “recently reduced charges on Federal Reserve’s dollar liquidity swap arrangements with major foreign central banks.” In contrast, Kansas City Fed once again pushed for a quarter-point increase, while the remaining ten regional Fed banks sought to keep the discount rate unchanged. The recent development coming out of the Fed suggest central bank officials are struggling to meet on common ground amid the slowdown in the world economy, and we may see the FOMC maintain a neutral policy stance throughout the first-half of 2012 as the global landscape remains clouded with high uncertainty.

 

[Jason Rogers]

USD Index Poised For Bullish Breakout, Euro Outlook Weighed By ECB

Written by David Song of DailyFX.com

DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.45 percent higher from the open as market participants scaled back their appetite for risk, and the rebound from 9,946 may gather pace over the next 24-hours of trading as the index breaks out of the downward trending channel. As the recent developments coming out of the world’s largest economy highlight a more robust recovery, we should see the Federal Reserve soften its dovish tone for monetary policy, and the Beige Book could heighten the bullish sentiment surrounding the greenback as market participants scale back speculation for another large-scale asset purchase program. However, as the 30-minute RSI falls back from a high of 71, the technical outlook certainly points to a short-term correction, and we may see the index hold steady ahead of the central banks economic report as market participants weigh the prospects for future policy.

As the USD holds key support at the 61.8 percent Fibonacci retracement (9,947), we’re putting less emphasis on the bearish RSI divergence, and the dollar index looks poised to mark a higher high as the fundamental outlook for the United States picks up. As a result, we may see the greenback make another run at the 78.6 percent Fib (10,117) over the remainder of the week, but a bullish breakout remains on the horizon as price action approaches the apex of the ascending triangle. In turn, the greenback may retrace the downturn from December 2010 (10,334), and the USD may outperform against its major counterparts throughout 2012 should the Fed see scope to conclude its easing cycle this year.

Indeed, all four components lost ground on Wednesday, led by a 0.85 percent decline in the British Pound, while the Euro shed 0.68 percent ahead of the European Central Bank interest rate decision. Although the ECB is widely expected to keep the benchmark interest rate at 1.00%, the press conference with central bank President Mario Draghi could spur a sharp selloff in the single currency as we expect the Governing Council to strike a dovish outlook for monetary policy. As the fundamental outlook for the euro-area turns increasingly bleak, the 23.6 percent Fib from the 2009 high to the 2010 low around 1.2630-50 may give way, which could open the door for a test of the August 2010 low at 1.2586.

 

[Jason Rogers]

Euro May Have Bottomed versus US Dollar

Written by David Rodriguez of DailyFX.com

EURUSD – Trading crowds have turned aggressively net-short the Euro against the US Dollar, giving strong signal that the recent rally may be the major turning point we have been expecting for some time. Last week we prematurely called for a Euro bottom as there were early signs of a reversal. Yet short interest is now at its highest since October 25, at which point the EURUSD was trading at 1.3900 and was on its way above the 1.4000 mark.

Our SSI ratio stands at -2.00 as there are 2 traders long for every 1 short. Although past performance is no guarantee of future results, such one-sided extremes can often come at major turning points. Given where we stand in terms of overall market positioning, this could very well be the start of a bigger upside EURUSD correction.

The obvious caveat in this forecast is that the Euro is already 300 pips off of its lows, and the “easy part” of this pullback trade may already be over. In other words, the Euro rally could slow down and we could see sideways trade until further notice, limiting the appeal of fresh Euro/US Dollar long positions.

 

[Jason Rogers]

Traits of Successful Traders

During the 2011 FXCM Currency Trading Expo, David Rodriguez presented a series of workshops on the Traits of Successful Traders. David analyzed over 12 million real trades conducted by FXCM clients worldwide in 2009 and 2010 to identify the currency pairs traders were most successful trading, the trading session traders were most successful during, etc. in an effort to shed more light on what separates successful traders from unsuccessful traders.

This analysis is now available in a four part series called "Traits of Successful Traders", and you can find it attached in PDF document to this post.

 

[Jason Rogers]

Analyst Interview: John Kicklighter on Whether the EURUSD Rally Lasts

An interview with John Kicklighter of DailyFX.com

•This week happens to be a relatively busy week of US economic data releases that includes the GDP report, an interest rate decision, home sales data and the durable goods report. What do you feel will be the one or two most important events and themes to pay attention to for the week and for the rest of January?

All of the economic data that is scheduled for release through the immediate future will play a role in shaping expectations for the relative health of the United States – an important consideration when there is a very real threat of recession for many of its most prominent counterparts. However, most individual indicators (like the housing data, durable goods orders and for that matter, probably even next week’s NFPs) will not significantly alter the larger consensus trend. The exception is the first reading of 4Q GDP. This figure can confirm or deny the market consensus, and catching market participants off guard on a big theme like this is a rare enough event that its impact is leveraged. Tapping the more elemental consideration of risk/reward, the FOMC decision could also be a market mover as it will offer a better framework for further stimulus and the eventual withdrawal of easy money. This particular meeting is a unique event as they will start producing interest rate forecasts along with their updates on growth and policy bearings. These are the known and definitive considerations. Real impact potential though comes from the unknown – speculation of QE3 and progress on the most recent ‘hope revival’ for the euro.

•The EUR/USD has now broken above the 1.30 level this week in trading. Do you feel the EUR/USD can sustain this momentum at these levels and perhaps ascend higher?

From a purely fundamental perspective, I think the euro has no business posting a meaningful advance. That said, this isn’t an academically-based fundamental world. Sentiment determines when a currency needs to be repriced. That being said, the market will itself to be caught up in the hope that additional stimulus is coming through for the Euro-area and that the Greek situation will be reconciled because the short-side is temporarily oversaturated. Though not a full representation of the spot market (due to difference in market depth and participation) the COT report of net speculative interest in Euro futures set a record level of shorts through the week ending Tuesday. Often, when we reach these extremes, it is a sign that one side of the market has been exhausted and a correction would be easier to facilitate. Given the depths the euro has plunged on an exchange rate and futures positioning basis, a bigger rebound wouldn’t be too hard to facilitate.

•Seeing the CFTC futures speculators data showed that specs were still very euro-bearish last week, do you feel we could perhaps see a change in sentiment (a bottom reached and/or a short squeeze?)?

The CFTC’s Commitment of Traders report measures open positions to the Tuesday of that week. Therefore, the record net short exposure reading that we were given was not representative of the big Euro rally on Wednesday and Thursday. There is a good chance that exposure will see a correction with the next reading to account for the recent change in EURUSD’s bearing (even if it is temporary). That said, a quick reversal (in either price or extreme positioning) doesn’t necessarily guarantee a larger trend reversal. It’s important to remember in these times that there are corrections in larger trends.

•What do feel is propelling the AUD/USD and the NZD/USD higher at this point? They are now respectively trading at their highest levels since October. Despite the AUD and NZD's correlation to risk, these two pairs have largely avoided the euro's slide of the last few months.

The euro itself is not a good representation of risk. We have seen the correlation between EURUSD and the S&P 500 (my favored gauge for risk appetite) deteriorate significantly over the past week. Anything can be a catalyst for broader risk aversion, but it doesn’t guarantee that everything and anything will do it. Through the euro’s recent slide, we have seen demand for equities slowly but steadily chop higher to five month highs. It is this acceptance of risk and appetite for higher yield that is encouraging capital to flow over to the higher yielding currencies.

•The USD/JPY has been trading in a relatively tight range since the beginning of the new year roughly between 76.50 and 77.50. Do you see any catalyst upcoming that might be able to allow a breakout of this range? Likely more of the same sideways action?

The US dollar and Japanese yen are frustratingly, evenly matched as safe havens – that is in tolerable market conditions (should the very stability of the world’s financial markets come into question, capital will move over to the US dollar and its Treasuries, no questions asked). With volatility behind risk trends smoothing out, the need to favor a particular low-yield and deep-market currency diminishes significantly. Clearly, a crisis of global proportions could encourage a shift to the safety of the US market. In the absence of that overwhelming catalyst, we still have the possibility of BoJ intervention (though it seems they are looking at both EURJPY and USDJPY for inspiration).

•As we have entered a new year, do you have any predictions for winners or losers over the first half of the year in terms of specific currencies and trends? Any other markets you feel may have a bearing on the major currencies?

Given the heights equities (and exposure to risk in general) have marched to, a bigger correction in long-risk exposure is highly probable. That means, high yield currencies, equities, speculative commodities, and high-yield paper are at risk of a deep correction. And, if all come under significant enough pressure at the same time, we could possibly see the funding markets freeze up; which is a crisis unto itself. In a regular risk aversion scenario, we can see the US dollar and Japanese yen advance for currencies while government paper and money markets for the US, UK, Germany and Japan swell. After such a down leg, we could see one of two scenarios. A short-term downdraft would see the Fed or some other equally dedicated policy authority step in with an artificial booster in the form of stimulus. Otherwise, a longer deleveraging would eventually flag and send too much capital to the sidelines – and the void would eventually need to be filled so market participants can make money and possibly take advantage of considerable discounts (after a meaningful reduction in cost).

 

[Jason Rogers]

USD Index Points To Additional Strength, Yen Poise To Weaken Further

Written by David Song of DailyFX.com

DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.36 percent higher from the open after moving 91 percent of its average true range, and the bullish divergence in the 30-minute relative strength index instills a bullish outlook for the greenback as it breaks out of the downward trending channel from earlier this month. In turn, the rebound from 9,837 should continue to gather pace, but the reserve currency may face whipsaw-like price action later today as the Federal Open Market Committee interest rate decision takes center stage. Beyond the rate decision, the first batch of interest rate forecast will be closely watched across the financial market, but the Fed’s fundamental assessment of the world’s largest economy may play a greater role in driving price action as investors weigh the prospects for future policy.

As we look for a higher high in the USDOLLAR, the FOMC rate decision could pave the way for a major rally in the reserve currency as the more robust recovery dampens the central banks scope to push through another large-scale asset purchase program. As economic activity gradually gathers pace, we anticipate the Fed to strike an improved outlook for the region, and the central bank may continue to soften its dovish tone for monetary policy as the risk of a double-dip recession subside. However, Chairman Ben Bernanke may keep the door open to further expand the balance sheet in light of the ongoing weakness in the housing market, and the USD may come under pressure should the committee float the idea of purchasing mortgage-backed securities (MBS) to stimulate home purchases.

 

[Jason Rogers]

Written by David Rodriguez of DailyFX.com

Retail traders have literally never been more net-long the Euro against the Swiss Franc, underlining that most are aggressively speculating on Swiss National Bank intervention as the EURCHF approaches SFr 1.20.

Our proprietary FXCM Speculative Sentiment Index data shows that the number of retail traders long the Euro against the Swiss Franc outnumber those short by an incredible 26.6 to 1 – over 96% of retail traders are long. Needless to say most expect that the Swiss National Bank will defend their stated Euro/Swiss Franc exchange rate at SFr 1.2000.

Data source: FXCM Retail Client Data
Chart source: Tradestation

Will the Swiss National Bank Come to the Rescue of Retail FX Traders?

Retail speculators are heavily net-long the Euro against the Swiss Franc and have continued to buy into recent declines. This means that any major EURCHF rally would in effect bail out many underwater speculators from unprofitable positions. Yet one gets the sense that the Swiss National Bank is reluctant to give free money to the speculative FX market. That is: any intervention would likely be expensive and would almost certainly benefit many of the same speculators that continue to push the Euro/Swiss Franc exchange rate lower.

What does this mean for FX traders?

Given that we are in unchartered territory, it is difficult to say what the Euro/Swiss Franc exchange rate will do next. Realistically we believe the Swiss National Bank when they say that they will defend the SFr 1.20 floor with “unlimited amounts” of FX market intervention. Yet in practice it is difficult to believe they would come to the rescue of such a broad swath of forex speculators.

Over 96 percent of retail traders in our sample are currently long, and a Swiss National Bank intervention would almost certainly bail out many speculators holding unprofitable positions. That may be a difficult pill to swallow for a central bank embroiled in its own minor controversy over forex speculation. Yet ultimately the Swiss National Bank’s credibility is on the line, and a major EUR/CHF break below the SFr 1.20 could dramatically change traders’ perception of the central bank.

 

[Jason Rogers]

Forecast: Crude Oil to See $80 or Lower by Mid-2012

Written by David Song and Joel Kruger of DailyFX.com


Technical Outlook

Oil Breakout on the Horizon, $75 and $115 are the Key Levels To Watch

This is a market that has been trading by some real extremes over the past few years, with the price rallying to record highs by $147 in 2008 before reversing sharply to trade down towards $32 by the end of the year. Since then we have seen a gradual recovery, with the price reverting back to some form of a mean in the $100 area. From here however, it becomes quite difficult to forecast direction in this market over the course of H1 2012, with a break of the shorter-term high or low required for clearer directional bias. The key levels to watch above and below are $115 and $75. A break on either end will open the door for the next key extension. However, given the fact that this market has been in recovery mode since 2009, the risks seems to be favoring a move back towards the $115 area in the first half of 2012. Back under $92 would negate and open a drop back towards $75.

At the start of 2012, we expect crude prices to remain supported due to supply risks and rising expectations for economic growth. As the first half of the year drags on, however, we expect to see prices decline as the world economy slows down. We expect by the middle of 2012 to see crude oil (WTI) test $80, and perhaps even test long-term support at $75.


Fundamental Outlook

Price to Remain Supported in the Near Term on Tight Supply and Rising Demand

Growing tension amongst world policy makers has raised the risk of seeing elevated oil prices as an increasing number of countries implement trade sanctions against Iran - one of the top five oil producers in the world. Should fears of a supply side shock materialize, a panic could spur another test of $115 as the major consumers of crude are forced to tap their reserves. At the same time, the more robust recovery in the U.S. – the largest consumer of oil - has spurred speculation for greater demand. In turn, the short-term squeeze on supply along with projections for greater demand may establish a short-term floor around $100. However, the downside risks facing the industrialized countries should set the stage for lower prices in the coming months.

International Monetary Fund and World Bank Warn of Slowdown

Looking ahead a few months, the outlook for economic growth is important. The International Monetary Fund has called for lower growth in 2012, curbing its projection for the world economy to 3.3% from an initial forecast of 4.1%. In addition, the IMF called for a slower rate of growth in the emerging and developing economies, and went onto say that the sovereign debt crisis remains a leading concern for the group amid the heightening risk for contagion. The World Bank also lowered its global growth forecast to 2.5% from the 3.6% prediction released back in June, while noting a “slow” rate of growth for developing countries. The weakening outlook held by the two groups encourages a bearish forecast for oil, as slower growth should crimp demand for energy. Indeed, the bank sees oil prices averaging $98 in 2012 in light of “slowing global demand, growing supply, efficiency improvements, and substitution away from oil.”

Will The Slowdown In Global Growth Accelerate?

The major fundamental themes carried over from 2011 – the Eruopean debt crisis, slowdown in China, and sluggish US employment growth – dampen the outlook for oil. While a rise in business activity in the United States has helped to boost economic recovery there, households have scaled back on consumption. We may see an even more pronounced slowdown in retail spending as the stickiness in inflation saps purchasing power for households. As a result, we should see crude give back the advanced from the end of the previous year based on slackening demand and continually falling growth expectations. This would pave the way for a potential test of $80 in the next six months. Should the global landscape deteriorate even further, a marked slowdown in the global economy will threaten support around $75, which could open the door for a dip in crudes down to as low as $70.

 

[Jason Rogers]

Forecast: EUR/USD to Fall to 1.15 in First Half of 2012

Written by Joel Kruger of DailyFX.com

Medium-term technical studies point to more Euro weakness in Coming Months

A closer look at the longer-term chart shows the market locked in a well defined downtrend since posting record highs just over 1.6000 back in 2008. An initial low was recorded in October 2008 by 1.2330, followed by a lower top at 1.5145 in November 2009, a lower low at 1.1875 in June 2010 and the latest anticipated lower top by 1.4940 in April 2011. The failure to move higher in 2011 opens the door for the current downside extension which should ultimately look to retest and eventually break below the 1.1875, June 2010 lows. This would confirm the next lower top at 1.4940 and potentially point towards a deeper drop towards 1.1500.

As such, our outlook for the first half of 2012 is predominantly bearish while the market adheres to the broader underlying downtrend, and we would expect to see a move towards 1.1875 at a minimum before considering the potential for any meaningful recovery. In the interim, any rallies should therefore continue to be very well capped, with overbought short-term rallies viewed as compelling opportunities to look to build on short positions. Ultimately, only a 2-week close back above 1.3500 would bring this outlook into question and give reason for concern.

 

[Jason Rogers]

Euro Rally At Risk, Sterling To Falter On More QE

Written by David Song of DailyFX

Euro: Germany Prepares To Vote On Bailout, ECB To Preserve Dovish Tone

The Euro climbed to an overnight high of 1.3287 as European policy makers prepare to release the EUR 130B rescue package for Greece, and the single currency may appreciate further during the North American trade as the development fuels risk-taking behavior. Indeed, Germany said it may vote on the bailout package as soon as next week according to a spokesman for the Christian Democratic Union, while the deputy CEO of the European Financial Stability Facility said the fund will probably play a role in the Greek PSI as the European Central Bank refuses to take a haircut on its Greek debt holdings.

As talks on the debt-swap deal are expected to resume in Paris tomorrow, positive developments coming out of the meeting is likely to increase the appeal of the single currency, but the European Central Bank interest rate decision could pave the way for a short-term reversal in the EUR/USD as we expect President Mario Draghi to maintain a dovish tone for monetary policy. As the euro-area slips back into recession, the ECB may talk up speculation for additional monetary support, and the Governing Council may see scope to push the benchmark interest rate below 1.00% as subdued growth dampens the outlook for inflation. At the same time, Mr. Draghi may encourage commercial banks to take advantage of the second three-year loan facility on tap for the end of the month, and we may see the central bank carry its easing cycle into the second-half of the year as the fundamental outlook for the region remains bleak. As the EUR/USD struggles to push above the 100-Day SMA at 1.3340, we should see the exchange rate consolidate ahead of the ECB rate decision, but the euro-dollar could face a sharp selloff if the central bank surprises the market with a 25bp rate cut.

British Pound: BoE To Expand QE, 38.2% Fib To Serve As Support

The British Pound pared the rally to 1.5928 as market participants expect the Bank of England to boost the Asset Purchase Facility beyond the GBP 275B target, and the sterling may face additional headwinds on Thursday should the central bank keep the door open to expand its balance sheet further. According to a Bloomberg News survey, 49 of the 50 economists polled see the BoE increasing the AFP by at least GBP 50B in order to shore up the ailing economy, but the central bank may see scope to expand monetary policy further over the coming months as the Monetary Policy Committee continues to see a risk of undershooting the 2% target for inflation. In turn, the GBP/USD may have put in a near-term top following the failed run at the 200-Day SMA (1.5944), and should see the exchange rate fall back towards the 38.2% Fibonacci retracement from the 2009 low to high around 1.5730-50 to test for support.

U.S. Dollar: Index Eyes November Low, RSI Holds Above Oversold Territory

The greenback remained under pressure on Thursday, with the Dow Jones-FXCM U.S. Dollar Index (Ticker: USDOLLAR) slipping to a low of 9,672, and the reserve currency may continue to trade heavy during the North American trade as the U.S. equity market opens higher. As the rise in risk-taking behavior gathers pace, we may see the USDOLLAR make a run at the November low (9,665), but the index looks poised for a rebound as the relative strength index continues to hold above 30. As the benchmark equity indices come off of their highs, a shift in risk sentiment could pave the way for a near-term in the USD, and the reserve currency may track higher during the remainder of the week should the ECB and BoE rate decisions spur a flight to safety.

 

[Jason Rogers]

Euro Targets Highs Near 1.3550

Written by David Rodriguez of DailyFX.com

EURUSD – Retail forex trading crowds have remained aggressively net-short the Euro against the US Dollar since the pair broke above $1.2700, and the fact that crowds continue to sell gives us consistent signal that the pair may yet head higher. Total short positions rose 12.3% from last week, while longs are down a similar 13.3%.

Our Speculative Sentiment Index ratio stands at -1.93 as there are 1.93 traders short for every long (approximately two-thirds of all traders are short). As long as traders remain so aggressively bearish we will continue to watch for further highs.

There seems to be little in the way of Euro technical resistance until the 61.8% Fibonacci retracement of the 1.4250-1.2620 decline at 1.3620 as well as significant highs near 1.3550. Traders might also watch how the EURUSD reacts around the 100-day SMA at 1.3330.

 

[Jason Rogers]

Is the Eurozone Debt Crisis Good or Bad for Gold Prices?

Analysis by Ilya Spivak and Jamie Saettele of DailyFX.com

Gold overcame distinctly bearish physical supply and demand trends to find its way higher once again last year as investment demand continued to prop up prices. Indeed, according to figures compiled by GFMS Limited – a leading precious metals consultancy – mine production hit a record high in 2011. Meanwhile, jewelry demand, the most important source of physical gold-buying, suffered losses even in typically strong markets like China and India. By contrast, global investment demand rose over 20 percent to a record $80 billion.

Why Do Investors Like Gold?
Investors seek out the yellow metal for its store-of-value properties. This makes it attractive in two diametrically opposite scenarios. At one extreme, there is fear of inflation. Some people believe that the global economic recovery will gain significant momentum before central banks are able to rein in ultra-loose monetary policies and buy gold to hedge against the debasement of paper currencies. At the other extreme, some fear that the current weak recovery will come apart as stimulus efforts run dry. They like gold as an asset that will retain its intrinsic physical value even if financial markets break down anew.

Looking ahead, this makes for a deeply conflicted outlook for gold prices amid lingering uncertainty about the global macroeconomic environment in the year ahead. The headwinds facing the global recovery remain formidable, with the Eurozone debt crisis still a concern and boiling tension between Iran and Western powers threatening to disrupt oil supply chains, which could send crude prices soaring. On the other hand, the US economy seems to have gained some traction in the second half of 2011 and may help offset malaise elsewhere.

Is the Eurozone Debt Crisis Good or Bad for Gold Prices?
Turning first to Europe, the implications of lingering solvency fears in the Euro area for gold prices depend on the degree of sovereign stress. Over the past three years, EU policymakers managed to do just enough to avoid an outright default in a Eurozone member state but failed to meaningfully put to bed concerns that this may still happen in the near-term. Understandably enough, this has weighed on business and consumer confidence as well as hurt economic growth. This compounds the impact of austerity measures meant to trim runaway budget deficits. It has also produced a series of flare-ups in market-wide risk aversion as traders have been were routinely reminded of the problem by ratings agencies, spiking bond yields and a seemingly endless series of lackluster EU summits aimed at fixing the crisis.

If this status quo is to continue as policymakers limp toward a deeper fiscal union that ultimately lays the foundation for a restoration of budgetary discipline, the debt crisis’s impact on gold prices is likely to prove negative. Bouts of risk aversion stoke demand for liquid safe havens. This notably benefits the US Dollar, both via demand for the currency itself and for US Treasury bonds. The result is de-facto downward pressure on gold since the metal is denominated in terms of the greenback. Meanwhile, a now widely expected recession in the Eurozone – the world’s largest economy when taken collectively – is likely to keep prices in check, negating demand for a hedge against inflation.

If a disorderly default does materialize however, a credit crunch greater than that witnessed in 2008 promises to send paper assets into freefall once again, offering support to gold prices.

The US Recovery is Gaining Momentum – What Does This Mean for Gold?
Turning to the US, it appears that a fragile economic recovery is gaining ground. The tone of economic data began to noticeably improve in the third and fourth quarters of 2011 and economists’ consensus forecasts now suggest GDP will grow 2.3 percent in 2012. This would be a marked acceleration from the 1.7 percent increase recorded in 2011. At the same time, the Federal Reserve has lurched further toward the dovish side of the monetary policy spectrum, extending its pledge to keep interest rates “exceptionally low” by a further 18 months to the end of 2014.

Taken together, it is not surprising that these two developments have produced a strong pickup in inflation expectations (these are tracked by “breakeven rates”, which are the difference between yields on nominal and inflation-adjusted US Treasury bonds) and driven gold higher. The critical question going forward is whether the Fed is right in its apprehension about the growth outlook, and to what extent.

If the pickup noted in the second half of 2011 continues to accelerate while the Fed clings to an accommodative monetary policy posture, investors’ outlook for price growth will continue to strengthen, boosting gold prices further. Likewise, if the recovery begins to fall apart anew and prompts Ben Bernanke and company to introduce a third round of quantitative easing (QE3), gold has scope to climb as traders look to the metal for refuge against the Fed’s debauching of paper currency. In the case that the recovery slows only mildly such that inflation bets are contained but QE3 is not deemed to be warranted, gold will find it hard to continue higher.

Gold Outlook Cautiously Bearish in the First Half of 2012
While much remains uncertain and many of the components shaping the outlook for gold in the first half of 2012 remain in flux, we see the path of least resistance as likely favoring the downside. On the European front, the role of the ECB is proving critical. The bank is acting aggressively to secure Eurozone member states’ ability to borrow by buying sovereign debt. It is also flooding banks with cheap cash through 3-year LTRO operations counteract a credit crunch if a default does happen.
On balance, this means that an Armageddon-level scenario is unlikely at least over the medium term. While flare-ups in risk aversion are likely to continue as solvency worries reappear from time to time, this is likely to be the kind of stress that boosts the Dollar and Treasuries rather than unleash another market-wide meltdown. This bodes ill for gold.
As for the US, the recovery seems clearly stronger but remains fragile and uneven, which appears likely to keep inflation pressures at bay while discouraging the Fed from adopting QE3. Indeed, it seems Ben Bernanke and company have a much higher threshold for another round of asset purchases than previously, opting to conspicuously shift their approach towards a communications- and transparency-based strategy. This is likely to erode demand for gold as a hedge against runaway price growth.
-- Ilya Spivak, Currency Strategist, DailyFX


Technical Outlook

Gold is off to a thunderous start in 2012, advancing nearly 11% in January. January’s rally is the largest monthly advance since August. August turned out to be exhaustive, with gold plunging in September. The difference, of course, is that January’s rally follows a decline of over $300, which raises the possibility that the recent rally is the beginning of the next leg up in the decade-plus long bull market. By the same token, the 4-month decline from the high is the second largest in percentage terms since the decline into the October 2008 low. The decline into October 2008 was exhaustive on the downside but gold didn’t make much upside progress over the next year. These recent extreme rate-of-change figures are consistent with a peak in volatility for at least several months. In other words, expect gold to drift sideways between the 1900 area and the recent congestion centered around 1650. A range trading strategy is best employed with strict adherence to the mentioned levels. A drop below the December low would trigger a regime shift and more than likely a panic decline towards the 2011 low and 1300.

-- Jamie Saettele, CMT, Sr. Technical Currency Strategist, DailyFX

 

[Jason Rogers]

US Dollar Forecast to Decline as Markets Complacent

Written by David Rodriguez of DailyFX.com

The US Dollar showed early signs it could recover versus the Euro and Australian Dollar, but consistently low forex volatility expectations suggest the Dollar could hit further lows in the week ahead.

DailyFX Individual Currency Pair Conditions and Trading Strategy Bias

DailyFX PLUS System Trading Signals –Last week we wrote that exceedingly low volatility expectations pointed to further US Dollar declines, and much the same could be said of this week. Such an outlook looked at risk last week when the safe-haven US currency staged somewhat of a comeback. In fact we wrote that Friday’s important bounce in the S&P 500 Volatility Index served as a clear warning to US Dollar bears.

Yet Monday has seen the USD once again lower, and a similar drop in volatility expectations leaves our previous bias largely intact. As we wrote last week, the safe-haven US currency will tend to do poorly if markets do not fear large exchange rate moves. Given domestic interest rates near zero percent, speculators most often prefer being short US Dollars and long higher-yielders amidst slow market moves.

We favor USD weakness against the Australian Dollar, Canadian Dollar, and New Zealand Dollar especially. These currencies will tend to do well in such times of market complacency.

Market Conditions:
Volatility expectations trade near their lowest levels since the onset of the financial crisis in 2008. Such extremely low levels favor slow trends and tight currency trading ranges until further notice.

 

[Jason Rogers]

USD Shines as Risk Slides- CAD Resilient as JPY losses Accelerate

Written by Michael Boutros of DailyFX.com

Top Daily Performer: USD/CAD

The Canadian dollar is the top performing currency against a substantially stronger greenback with the pair higher by just 0.10% at 2pm in New York. The US dollar has mounted a counteroffensive as ongoing concerns regarding the deepening crisis in Europe continues to weigh on broader market sentiment with newswires reporting today that the EU finance ministers meeting scheduled for tomorrow has been postponed on account of incomplete Greek paperwork. As markets continue to wait on further resolution to the Greek dilemma, the March deadline quickly approaches with the country facing some €14 billion in bond redemptions and paybacks due on the 20th. Compounding the problem was a statement from Moody’s Investor Services which downgraded Italy, Portugal and Spain while putting the UK on negative outlook. Accordingly, risk appetite has remained under pressure with higher yielding assets coming under pressure as the greenback was bid higher on classic haven flows.

The USD/CAD broke above channel resistance dating back to January 13th back on Thursday with the pair now consolidating into the apex of a wedge formation between the 23.6% and 38.2% Fibonacci extensions taken from the January 3rd and February 3rd troughs at 0.9980 and 1.0015 respectively. The loonie continues to straddle the parity mark with a breach above the 38.2% extension eyeing subsequent topside targets at the overnight highs at 1.0025, the 50% extension at 1.0045, and the 6138% extension at 1.0070. A break below trendline support looks for soft support at 0.9965 backed by 0.9940 and the 2012 lows at 0.9924. Our bias on this pair remains weighted to the topside noting a break above key daily Fibonacci resistance at 1.0045 coupled with and RSI break above trendline resistance needed to provide further conviction on an extended USD/CAD rally.

The Japanese yen is the weakest performer against the dollar at late in US trade with a decline of 1.15% on the session. The greenback is now the chief beneficiary of risk-off flows with the yen falling against all its major counterparts today. Weaker-than-expected GDP data noted in yesterday’s Winners/Losers report prompted the Bank of Japan to inject another ¥10 trillion ($128 billion) into the economy in an effort to ward off further weakness as growth prospects continue to diminish.

The USD/JPY broke above the 100% Fibonacci extension taken from the January 17th and February 1st troughs at 77.75 before surging through the 123.6% extension to settle around the 138.2% extension at 78.40. Subsequent topside targets are eyed at the 161.8% extension at 78.80 backed by the 79-figure and the intervention highs at 79.50. Interim support rests at 78.15 backed by the 78-handle and the 100% extension at 77.75. Our medium-term bias on the USD/JPY remains weighted to the topside as haven flows now continue to favor the dollar.

USD/JPY

 

[Jason Rogers]

USDJPY Trades Through Major Trendline-October High Next

Written by Jamie Saettele of DailyFX.com

USDJPY – Has pushed above the 2008-2010 resistance line and is nearing the October high of 7953. 7850/70 is now support. Strategically, it is best to continue moving up the stop (move up from 7735 to 7815).

 

[Jason Rogers]

Written by David Song of DailyFX.com


DJ FXCM Dollar Index

The Dow Jones-FXCM U.S. Dollar Index (Ticker: USDollar) is 0.40 percent higher from the open after moving 104 percent of its average true range, and the shift away from risk-taking behavior should prop up the reserve currency as renewed fears of a Greek default drags on trader sentiment. However, as the 30-minute relative strength index falls back from a high of 72, it looks as though there will be a short-term correction before another move to the upside, and we will be closely watching the upward trending channel from earlier this year as the index struggles to push above 9,900. In turn, the USDOLLAR may fall back towards the lower Bollinger Band (9,839) going into the end of the week, but we maintain a bullish outlook for the greenback as the recovery in the world’s largest economy continues to gather pace.

Although the existing home sales report for January struck a mixed outlook for the housing market, the more robust recovery in employment paired with the ongoing expansion in production should help to encourage a stronger recovery, and we expect the Fed to further soften its dovish tone for monetary policy as the outlook for growth and inflation improves. As we’re expecting to see a slew of positive developments coming out of the U.S. economy, the data should curb speculation for another large-scale asset purchase program, but the event risks could fuel risk-taking behavior, which would dampen the appeal of the USD. Nevertheless, we will be watching for a close above the 50-Day SMA (9,884) to reinforce our bullish forecast for the dollar, and we may see the index make another run at the 78.6 percent Fibonacci retracement (10,118) as the Fed comes closer to concluding its easing cycle.

The greenback advanced against three of its four components, led by the 0.70 percent decline in the Japanese Yen, and the bearish sentiment underlining the low-yielding currency may gather pace over the near-term as the fundamental outlook for the world’s third-largest economy deteriorates. Indeed, the widening spread between U.S. and Japanese bonds has fueled the recent rally in the USDJPY, and the pair looks poised to appreciate further during the first-half of 2012 as the Bank of Japan expands its easing cycle. As Japanese policy makers scramble to stem the risk for deflation, the BoJ may continue to ramp up its asset purchases over the coming months, but the weakening outlook for the region is likely to produce headwinds for the Yen as market participants see the central bank maintaining the highly accommodative policy for a prolonged period of time.

 

[Jason Rogers]

Gold Looks to US Inflation Bets, Dollar Price Action for Direction

Written by Ilya Spivak of DailyFX.com

• Crude Oil May Pull Back but Bias Favors the Upside on Iran Tensions
• Gold Looks to US Inflation Outlook, Dollar Price Action for Direction
• Copper at Risk on Risk Aversion But Reports of Shortage May Support

Tensions with Iran continue to inject a considerable geopolitical risk premium into crude oil prices, with the WTI contract touching an 8-month high yesterday. The latest bit of escalation came after talks between Tehran and IAEA came apart after the government refused to allow inspection of a site in Pachin reported to be testing explosives.

Technical positioning warns a pullback may be ahead however (see below), hinting the recent batch of supportive news-flow has been priced in already. Still, with Iran reportedly starting to conduct civilian defense drills in preparation for armed conflict, the satiation is unlikely to be defused quickly (if at all) so the path of least resistance continues to broadly favor the upside.

Gold prices jumped to the highest in 3 month yesterday on the back of a widely-circulated Financial Times article that claimed the Federal Reserve will extend the so-called “Operation Twist” stimulus program beyond June. The scheme has the Fed selling shorter-term assets on its balance sheet in exchange for further-dated ones to target a decline in the long-term borrowing costs. Bloomberg News also cited sources saying buying by automated trading systems buoyed prices.

Looking ahead, strong correlations between precious metal prices US inflation expectations (measured by “breakeven rates”, the spread between nominal and inflation-linked Treasury bond yields) puts the spotlight on US jobless claims and House Price Index figures due today. An overnight pullback in the US Dollar may also emerge as a supportive factor, although a sudden downward reversal in S&P 500 stock index futures in early European trade may reboot safe-haven demand for the greenback to the detriment of both gold and silver. The selloff appears to have followed an EU Commission report forecasting the regional bloc’s collective economy will shrink 0.3 percent in 2012 (compared with previous estimates of a 0.5 percent expansion).

The emerging adverse reversal in risk appetite trends likewise bodes ill for Copper prices. The metal remains highly sensitive to global economic growth expectations, meaning the return of slowdown fears is likely to be a considerable headwind. Selling pressure may be at least partially offset near-term however amid reports that production lagged demand by the largest margin (119,000 metric tons) in November, according to ICSG.