Currency Market Shows Moderation As Traders Weigh Trend Strength And Bailouts
The worst financial crisis in recent history has racked the currency market, lending to distinct breakouts and over-extended trends. Now, market participants will need to decide whether officials have done enough to stabilize sentiment and more importantly if the massive moves that were derived from the panic necessitate a pull back from over-extended rallies. Read how each of our DailyFX Analysts are positioned with their picks for the week:
Questions about these picks? Visit the DailyFX forum for a Q&A with the Analysts.
Senior Currency Strategist - Jamie Saettele
My picks: Exit the rest of the EURUSD short from 2 Mondays ago. Enter long EURJPY (limit order at 135.5), against 134.15, target 141
Expertise: Technical
Average Time Frame of Trades: 1 Month
Wave structure as well as other technical considerations suggest that the EURUSD is at the beginning of a larger recovery that should last for the rest of October. A return to the 1.4-1.42 zone seems likely. This is the confluence of Fibonacci (50% and 61.8%) of the decline from 1.4871 and a potential resistance line from the top (1.60).
The EURJPY has tested what could be strong support from the 38.2% of the entire advance from the 2000 low / center of a multi year congestion area. A return to at least 141 is likely although a much larger advance is possible.
Currency Strategist - John Kicklighter
My picks: Pending GBPUSD Long
Expertise: Combining Money Management with Fundamental and Technical Analysis
Average Time Frame of Trades: 3 days - 1 week
The efforts being made to end the global financial crisis have grown exponentially over the past few weeks. And, with the world's economic leaders making sweeping resolutions to revive confidence once and for all, it is important to looking for positions that would take advantage of scenarios where fear is completely alleviated or the credit crunch once again permeates the fragile psyche of the markets. A position fundamentally for both scenarios is long GBPUSD. From the standpoint where confidence is not improved, the British government has already put into effect a 500 billion pound bailout plan (one that dwarfs the US's own plan considering the far fewer banks in the UK economy). What's more, the UK policy officials have shown they are more than willing to nationalize a bank to immediately secure its operations - a step that the US has shied away from. On the other hand, if the market is comforted by the additional capital and guarantees the global financial authorities have injected into the markets, the oversold pound is backed by one of the most extensive plans in the industrialized world to get activity back on track. What's more, the stabalization would further allow BoE members to focus on inflation which would keep rates relatively high against its counterparts.
The scenarios laid out above are quite expansive and the markets are certainly open to the threat of high volatility even if things do settle down. Taking a position on this grander (fundamental) scale, it is important to take a longer-term approach and have clear levels to work with. For entry, I would consider a higher time frame close above 1.75 as strong evidence of a reversal as this level was the swing low from September and there is also the 50% retracement of the June 2001 to November 2007 advance at 1.7435. Caution would dictate a wide stop, but the developing rising trend on the lower time frame can substitute the swing low from Friday as a cutting point. Targets should be reasonable. Percentages of the September 25th to October 10th decline should be targeted for their potential for actually being hit over a reasonable amount of time.
Currency Strategist - Terri Belkas
My picks: Long EUR/JPY
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 1 - 3 Days
Signs of an improvement in investor sentiment since Sunday's forex market open has led the US dollar to pull back sharply, while EUR/JPY has climbed higher. With European, UK, and Swiss central banks now providing unlimited dollar funding in a coordinated effort with the Federal Reserve, foreign stock markets have rallied quite a bit, with the DAX Index up over 7 percent while the FTSE 100 trades more than 4 percent higher. This is likely to translate into a stronger opening in US stock markets today, as DJIA futures are up over 350 points. With traders becoming a bit more risk-seeking, I'm cautiously bullish EUR/JPY today and looking for a test of 139.50/140.00. This morning's highs of 137.79 are indicative of decent resistance, but as long as price holds above 136.00, my bias will be in favor of a move higher.
Currency Analyst - David Rodriguez
My picks: USD/CAD Short
Expertise: System Trading
Average Time Frame of Trades: 2-10 weeks
I'm really at a loss as to what to expect from currency markets in the week ahead, and whenever that happens, I fall back on my forté--system trading. With that said, our DailyFX+ Trading Signals recently sold the USD/CAD pair across three different systems, and this is typically a good confirmation that the signal will be accurate. Monitor the trade through our trading signals page, as these systems can and do change on a daily and intraday basis.
Currency Analyst - Ilya Spivak
My picks: EURUSD Short (Pending)
Expertise: Macro Fundamentals, Classic Technical Analysis
Average Time Frame of Trades: 1 week - 6 months
The Euro gapped higher 161 pips higher at the open of the trading week as traders sold US dollars bought amid sweeping risk aversion of recent weeks. A meaningful rebound in risk appetite will likely see the US dollar come under continued selling pressure in the coming weeks as capital reverses course having poured out of higher-risk investments and into long-term US treasury bonds. However, the longer-term perspective continues to favor the Dollar as priced-in interest rate expectations point to the greenback gaining at least 150 basis points on the Euro over the next 12 months. Look for a bullish correction to break above resistance at 1.3910, the 23.6% Fibonacci retracement of the 07/15-10/10 decline. Selling opportunities should open up on a test of the downward-sloping trend line connecting highs of the same down move (from 7/15), tentatively near 1.41.
Currency Analyst - John Rivera
My picks: Long GBPUSD
Expertise: Fundamentals Combined With Technicals
Average Time Frame of Trades: 2-4 Days
The GBPUSD is moving to the upside after we saw a hammer candle on Friday. The nationalization of the U.K. banks has eased fears and given the Sterling momentum. After hitting five year lows we could se a nice retracement. The 20 Day SMA of 1.7875 and 1.8069 the 38.2% Fibo extension of the 2.0161-1.6776 decline, are possible targets.
Currency Analyst - David Song
My picks: Short NZD/JPY
Expertise: Fundamentals Combined with Technicals
Average Time Frame of Trades: 2 Days - 2 Weeks
Last week, the NZDJPY plunged 950+ points to touch a low of 57.28, and the lack of risk appetite continues to favor a bullish outlook for the Japanese yen. The efforts by government authorities all over the world have yet to restore confidence within the global financial market, and as long as banks are unwilling to lend, I will continue to trade in favor of the yen. Amid the increased volatility in the financial markets, I anticipate the pair to downward momentum to drag the pair lower in the near-term, and expect the pair to work its way towards 9/18/02 low of 56.72 over the next few weeks.
DailyFX
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