Dollar on Defensive at End of Year

Euro Continues Rebound
The EUR climbed to a two week high against the USD overnight as traders readjusted positions going into the new year and short positions were stopped out.  The common currency printed a high just below the 1.34 figure which is a nice move after starting the week in the low 1.30 range, although currency movements at this time of year can be taken with a grain of salt due to the reduced levels of liquidity.  Intraday moves still remain fairly erratic in most major currencies as most traders would prefer to wait until next week when business returns to normal and trading conditions improve.  Coming into the new year, one of the big unknowns in FX markets will continue to be the European debt situation as investors and traders try to assess the health of the EU and the more heavily indebted peripheral economies.  Up until now the EU has been more reactionary to the crisis and haven’t been able to come up with a concrete plan on how to deal with another bailout should it happen.  The market seems to want the EU to be proactive and provide some sort of fund that can be used in the event of another sovereign bailout, and above all the market wants to know how big this fund will be.  Until there is some more clarity on the issue it is hard to believe that the EUR will continue to make substantial gains against most major currencies as the risks to the downside are just too great.
China in Focus for 2011
China has been very much in focus in 2010 and 2011 should be no different, as the world’s most populous nation continues to throw their substantial economic weight around.  The CNY finished at its strongest ever level and was up 3.4% for the year, helping to take some political pressure off the Chinese administration from the international community regarding currency manipulation.  Economic data from China remains very positive on many fronts and GDP continues to grow at a torrid pace, forcing the People’s Bank of China to resort to several different methods of restricting the money supply in order to put the brakes on their red hot economy.  They have done everything short of raising the benchmark interest rate but there is rampant speculation across the globe that a rate hike is inevitable, and when it comes it should be a big negative for risky assets.  China is now seen as one of the main engines for global growth, so if they get aggressive on raising interest rates in 2011 it could make it a tough year for global asset markets and currencies alike, especially commodity linked currencies like the Canadian and Australian dollars.
Loonie Ends the Year on a Strong Note
The Canadian dollar continues to trade close to parity with the USD coming into year end, although it has traded in a very tight range all week.  The loonie has traded better than par against the USD several times this year, but has lacked the conviction to make a substantial move lower.  The CAD has only had a couple of daily closes better than parity for the year, giving proof that both speculators and corporate hedgers believe this level is a good place to be selling the loonie.  The run up in commodity prices has obviously helped the CAD, but Canada cannot live by oil alone and it will take more than just a high price of crude to keep the loonie at these levels on a sustainable basis.  The Bank of Canada is seemingly on hold for the next few months at least, and global growth is not looking too rosy for 2011 so the prospects for further gains are not great.  The US is our biggest trading partner so until things improve south of the border we can expect the same rangebound trading for the near future in USDCAD.  

Have a great weekend.

Current Currency Rates

Currency Unit	USD per Unit	Units per USD
	USD United States Dollars	1.0000000000	1.0000000000
	EUR Euro	1.3288777512	0.7525146682
	GBP United Kingdom Pounds	1.5412419481	0.6488273961
	CAD Canada Dollars	1.0001237897	0.9998762257
	AUD Australia Dollars	1.0159966340	0.9842552293
	JPY Japan Yen	0.0122633116	81.5440423040
	INR India Rupees	0.0223064903	44.8300018311
	NZD New Zealand Dollars	0.7721825914	1.2950304904
	CHF Switzerland Francs	1.0687923476	0.9356354415
	ZAR South Africa Rand	0.1510006496	6.6224880652

US Interest Rates Dip on Foreign Demand

Swissy Rallies to Record High on Safe Haven Flows

The US dollar index continued to trade heavy through last night’s Asian and European sessions following Wednesday’s US Treasury bond auction that saw prices firm considerably and yields drop dramatically on significant buying interest.  The auction was held for 7-year securities, those specifically targeted by the Fed’s quantitative easing program in an effort to bring down USD interest rates and while the end result would have brought a smile to Ben Bernanke’s face, the bids were mostly emerging from Asia.  A very strong bid to cover ratio for the $29B auction, which signaled strong demand for the US paper, resulted in a record volume of bonds being purchased by foreign interests at 64.2% of what was offered.  The yield on those bonds retreated to 2.83% and the US dollar has continued to shed value overnight in falling more than a percent on a trade weighted basis to again exchange hands with a 79.0 handle as investors the world over continue to seek safe harbor for their capital amid the ongoing sovereign risk concerns in Europe.  As might be expected, sterling took a pounding alongside the dollar though the euro actually held up relatively well, especially considering the fact that a quiet data calendar across the pond delivered very little support for the common currency.

On the opposite side of the ledger, the Swiss franc advanced to a fresh all-time record high against both the EUR and USD overnight as investors continue to select the Swissy as the preferred store of value given the economic turmoil in the US.  The yen also continued to pick up bidders overnight, trading to a fresh 7-week high against the dollar with the decline in USD yields.  That said, one could also characterize the day’s price action not so much as a flight to safety but as a flight from the pound and dollar, as the Aussie again traded to a 28-year high against the dollar amid the mass exodus of investment capital.  It seems while a great deal of liquidity was flowing into US Treasuries as a store of value, a good portion of the currency risk was being swapped for higher yielding alternatives to the slumping Greenback as the Antipodean currencies have fared quite well in early trading this morning.  The strategy for hot money managers overnight then seems to be find a safe place to park cash (Treasuries), but don’t dare actually leave those USD funds unhedged.  

While there was no shortage of trading taking place on the heels of the Treasury auction, last night’s fevered activity has died a quick death this morning as the reality of holiday trading conditions again begin to take hold.  To that end, while we’ve seen some rather dramatic price action on the past 24 hours, one must keep in mind that the moves are being exaggerated by thin conditions and reduced liquidity, therefore reducing the importance of the day’s activity in terms of sending true price signals.

CAD Remains Tethered to Parity
If there was a great deal of activity in currency markets overnight, someone forgot to pass the memo to all of the USDCAD traders.  Thanks to a momentary spike lower, USDCAD traded in a 54-point wide range overnight, though the vast majority of the session was contained within a much narrower 20-point range centered on parity.  Both implied and actual volatility levels continue to come in as the price action concentrates, a situation that often results in a significant break in the end, though it is hard to imagine what might cause such a move at this point in time.  With the Canadian data calendar bare on the day, USDCAD will take its cues from data emanating from the US as well as the broader market for risk.

The US calendar has seen two rather significant upside surprises this morning.  Initial jobless claims came in well under expectations last week, though this reading could be more a function of reduced filings during the holiday season than a real firming in labor market conditions.  That said, the Chicago Purchasing Manager’s Index, a key leading indicator of manufacturing activity in the city, came in well above expectations as well.  The market is still expecting to see the release of pending home sales and natural gas storage figures later today.
Mark Frey, Regional Director for Corporate Canada

Potential for USD.CHF Trade Setup

FUNDYS

Despite some aggressive and notable moves in certain currencies over the past few days to record and multi-year highs against the US Dollar, it is worth noting that the USD Index, which measures US Dollar performance against a basket of major currencies, has not drifted too far from familiar ranges. This should mitigate the latest price action somewhat and remind us that current market conditions are not ideal in the lightened end of year trade. The Australian Dollar and Swiss Franc remain very well bid on the whole, but have also failed to materially extend gains thus far. While Usd/Chf, Eur/Chf and Gbp/Chf have all dropped to record lows on Thursday, the fresh declines are not dramatic by any means. Meanwhile the Yen has also been outperforming on the back of what appears to be some short covering.

Relative Performance Versus USD Thursday (As of 10:15GMT)

1. SWISSIE+0.72%
2. YEN +0.21%
3. EURO+0.16%
4. KIWI+0.14%
5. CAD+0.12%
6. STERLING-0.03%
7. AUSSIE-0.11%

As far as any real or meaningful developments are concerned, all is very quiet on Wednesday thus far. UK BOE member Andrew Sentance has been on the wires talking of higher rates, although the comments are hardly a surprise coming from the hawkish central banker and have failed to influence price action. Traders who are still on the desk are already thinking about the New Year’s weekend, and we do not see much in the way of any material moves in the FX markets from here into Friday. From a strategy standpoint, there is simply no good reason to be taking any positions in the extremely thin trade, and we would not expect to see normal market conditions return until the second week of January.

Looking ahead, all of the key data releases on the day come out of the US, with initial jobless claims (415k expected) and continuing claims (4084k expected) out at 13:30GMT, followed by Chicago PMI (61.0 expected) at 14:45GMT and pending home sales (2.0% expected) at 15:00GMT. Oil and gas inventory data then rounds things out at 16:00GMT. US equity futures and commodities prices are tracking marginally higher on the day.

TECHS

EUR/USD:The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. As such, any intraday rallies towards the 1.3350 area should be used as formidable sell opportunities.

USD/JPY:The latest break and daily close back below the daily Ichimoku cloud and 82.00 handle is significant and certainly delays and hopes for recovery prospects. From here, the focus shifts back on the multi-year and near record lows just ahead of 80.00, with a break below to officially expose the all-time lows by 79.75 from 1995. Nevertheless, we do not recommend looking to sell at current levels given the very thin trade, and would instead favor looking to buy into dips given the longer-term cyclical lows and likelihood for a major bullish reversal into early 2011. For now, a daily close back above 82.00 will be required to relieve downside pressures.

GBP/USD:The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are in the process of unwinding from oversold levels, so we would not rule out the possibility for more of a bounce towards the 1.5700 area over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.

USD/CHF: (See below)

TRADE OF THE DAY

USD/CHF: We have said that we would not look to put on any trades in these final days of 2010 given the extremely thin market conditions, barring a set-up that was screaming out at us. Well, today’s price action in this market is certainly screaming out, with the pair dropping to yet another fresh record low in otherwise meaningless trade. In our opinion, this market is even more subject to a violent upside reversal given these latest moves. Intraday studies are tracking oversold, while longer-term studies are also quite stretched. It is worth noting that the monthly ATR of 580 points has also now been well exceeded. Additionally, the latest drop in the price has not been confirmed by technical indicators which have failed to move lower along with the price. As such, we like the idea of using the daily ATR of 110 points to help isolate and entry for a very playable counter-trend long position, and will look to take advantage today on a drop towards 0.9350. STRATEGY: BUY @0.9355 FOR AN OPEN OBJECTIVE; STOP 0.9255. RECOMMENDATION TO BE REMOVED IF NOT TRIGGERED BY NY CLOSE (5PM ET) ON THURSDAY.

Current Currency Rates

Currency Unit	USD per Unit	Units per USD
	USD United States Dollars	1.0000000000	1.0000000000
	EUR Euro	1.3218119217	0.7565372831
	GBP United Kingdom Pounds	1.5508514024	0.6448071030
	CAD Canada Dollars	0.9994369565	1.0005633607
	AUD Australia Dollars	1.0174747168	0.9828254044
	JPY Japan Yen	0.0122493291	81.6371242602
	INR India Rupees	0.0222518921	44.9399986269
	NZD New Zealand Dollars	0.7663783456	1.3048385380
	CHF Switzerland Francs	1.0566911082	0.9463503499
	ZAR South Africa Rand	0.1500837282	6.6629474906

Current Market Conditions: Choppy

Majors Rangebound

All major currencies were rangebound overnight as a distinct lack of market liquidity ensured that no new ground would be broken in fx markets.  With most market participants away from their desks at the moment, volatility still remains high as illiquid conditions make for choppy price action heading into the year end.  This is a time of year that often makes for wild swings in currencies, as the mix of low liquidity and year end flows from corporates and institutions causes outsized moves.  This reality makes it important for hedgers to ensure they have a plan in place to protect themselves from these choppy market conditions, as it does not take long for things to move in this day and age.  Market orders are a great way to bid for a certain rate and also give the ability to set a worst case rate to transact at should the market trade against you.  A lack of high impact economic data for the rest of today should mean that currencies will follow equity markets for direction.
A Tale of two Dollars
It seems as if the US dollar is more than just one currency at the moment, trading in divergent directions against a host of different major currencies.  On the one hand, you have the USD versus Europe, which is very much the story of the “strong” USD, or weak EUR and GBP.  The sovereign debt crisis in the Eurozone has taken a break for the holidays but traders aren’t that soon to forget and have kept the pressure on the common currency coming into year end.  The big issue in this case still remains whether or not the EU will come through with some sort of tangible rescue fund or if it will continue to bail out troubled nations on a case by case basis.  The market is clearly looking from something proactive from the EU before they get long Euros again. Then we have the sterling, which is plumbing 4 month lows and is being brought down in tandem with their partner from the continent.  While things in the UK certainly aren’t rosy, inflation has been on the uptick and economic data has been showing signs of improvement.  Then there is the other US dollar, the one who continues to be punished in the face of huge government deficits and extraordinarily easy monetary policy.  Any currency that is positively linked to risk is on a tear against the USD as commodity prices continue to rise and the outlook for the US economy remains decidedly uncertain.  The Australian and Canadian dollars are two prime examples of this, as both trade above parity with the USD and don’t seem uncomfortable doing so any more.  The Aussie is trading near its post float high, and with China as your biggest trading partner and commodities soaring it seems as if the AUD is well supported at these levels.  The big risk here will come from China, as they still try to find ways to put the brakes on their economy that don’t involve raising the benchmark interest rate.  If China becomes aggressive in this fight, then that would deliver a big blow to the Aussie as they rely so much on China to devour their exports.
Have a great day

Snapshot Overview of Overall FX Market Price Action in Final Days of 2010

FUNDYS

We are in the final days of trade for 2010, and the price action is not disappointing, with the market trading in a very choppy, directionless, unpredictable manner. Any Euro bids have been quickly sold to keep the major locked in some consolidation, while price action in Sterling has been similar. Meanwhile, the Swiss Franc has broken to fresh record highs against the buck, but at the same time has failed to hold onto to those gains with Usd/Chf immediately rebounding back above 0.9500 and holding above the previous record lows from September by 0.9560 to still suggest that a material base could be carving. Usd/Jpy has also broken down through critical short-term support by 82.00, but as per our analysis, inability to close below 82.00 keeps the multi-day consolidation intact and leaves the door open for a bounce back to retest and break the range highs by 84.50. Fundamentally, the latest Yen surge has also ramped up Yen rhetoric from local officials which should also serve as a prop for Usd/Jpy.

Relative Performance Versus USD Wednesday (As of 11:10GMT)

1. KIWI+0.75%
2. AUSSIE +0.38%
3. YEN+0.32%
4. CAD+0.25%
5. STERLING+0.15%
6. EURO+0.05%
7. SWISSIE+0.01%

The commodity bloc continues to outperform, although, Aud/Usd has stalled out ahead of the post-float record highs from November, while Usd/Cad has once again failed to sustain any declines below parity. On the cross front, we continue to pay close attention to the Swiss and Aussie crosses, with both currencies standing out as the major outperformers. Eur/Chf and Gbp/Chf trade by record lows, while Eur/Aud and Gbp/Aud are also at major long-term cyclical lows. As such, we anticipate some form of a material catalyst into 2011 which will reverse these trends and offer some very compelling trade opportunities. Elsewhere, the Yen crosses have come back under some intense pressure with Eur/Jpy breaking to fresh multi-day lows below 108.00 and Gbp/Jpy dropping back into the 126.00’s. However, here too, we see risks for bullish reversals over the short-term at a minimum.

Data released in Europe saw German inflation come in higher than expected, and Eurozone M3 also above forecast. Meanwhile, the Swiss KOF leading indicator also managed to exceed expectation. Other news has included warnings from Moody’s that austerity may not be enough to help some of the EMU peripherals stave off default, and concerns out of the UK over the outlook for the local economy with housing, unemployment and the financial sector all brought into question.

Moving on, there has been an escalation in talk over the direction of Fed policy going forward, with a number of notable hawks set to move into the FOMC voting rotation in 2011. Fed Plosser and Fisher are the key names, and given the current state of hyper-accommodation, we could start to see some major resistance with these views playing an influence on price action in the markets. Clearly the addition of these members makes a stronger case for broader USD upside, as they focus more on the need to raise rates to offset very real longer-term inflationary threats.

Looking ahead, the North American economic calendar is quite uneventful with US mortgage applications at 12:00GMT followed by Canada Teranet/National Bank HPI at 14:00GMT. US equity futures are marginally higher while commodities have been consolidating their latest gains and track slightly lower.

TECHS

EUR/USD:The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. As such, any intraday rallies towards the 1.3300 area should be used as formidable sell opportunities.

GBP/USD:The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however looking a little stretched so we would not rule out the possibility for a bit of a bounce over the coming sessions from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.

USD/CHF: Despite the latest drop to fresh record lows on Tuesday by 0.9435, inability to close below the previous record lows by 0.9460 and subsequent break and close back above 0.9500 keeps our basing bias intact and we continue to look for some major upside over the medium and longer-term. Cyclical studies are showing oversold and any additional declines below 0.9400 are not seen as sustainable. Look for a break back above 0.9700 to confirm and relieve immediate downside pressures, while only a close below 0.9400 gives reason for concern.

USD/JPY:Despite the latest pullbacks, the market still remains confined to a broader consolidation, and while the price holds above the bottom of the Ichimoku cloud on a close basis, the overall outlook remains constructive with dips towards 82.00 to be used as compelling buy opportunities. A break and close back above 84.50 will however be required to end what is perceived to be a bullish consolidation and accelerate gains. A close below 82.00 on the other hand, would compromise outlook and give reason for pause.

Current Currency Rates

USD United States Dollars	1.0000000000	1.0000000000
	EUR Euro	1.3119090478	0.7622479635
	GBP United Kingdom Pounds	1.5374567433	0.6504248034
	CAD Canada Dollars	1.0001463282	0.9998536932
	AUD Australia Dollars	1.0101161068	0.9899852040
	JPY Japan Yen	0.0121374776	82.3894411938
	INR India Rupees	0.0222469407	44.9500007629
	NZD New Zealand Dollars	0.7557380856	1.3232097456
	CHF Switzerland Francs	1.0503733274	0.9520424538
	ZAR South Africa Rand	0.1498552311	6.6731070564

Current Currency Rates

Currency Unit

USD per Unit

Units per USD

USD United States Dollars

1.0000000000

1.0000000000

EUR Euro

1.3151554518

0.7603663876

GBP United Kingdom Pounds

1.5405030110

0.6491386209

CAD Canada Dollars

0.9927889800

1.0072633965

AUD Australia Dollars

1.0038567462

0.9961580712

JPY Japan Yen

0.0120740103

82.8225230331

INR India Rupees

0.0221606648

45.1250000896

NZD New Zealand Dollars

0.7495450093

1.3341426966

CHF Switzerland Francs

1.0410623683

0.9605572446

ZAR South Africa Rand

0.1484589020

6.7358709133

Careful Trading

Just a quick reminder to be careful during this week of trading. Trading will be light, and the currencies move quickly. Set your stops tight, or just sit out the week and enjoy the break!

Santa Claus Rally

FOREX: Santa Claus Rally and the Potential for a Breakout

By Kathy Lien

The past week has been a quiet one in the foreign exchange market with the dollar consolidating against the euro and Japanese yen. The only currencies that really moved were the Swiss franc, which rose to a record high against the euro, and the British pound which fell to a three-month low against the dollar.

Despite the lack of a big move in the greenback against most pairs, quite a bit of U.S. economic data was released. The only problem was that the data confirmed what investors already knew—the U.S. economy is improving at a sluggish pace.

Next week’s economic reports are not expected to help because data is limited. The only potentially market-moving reports will be the Consumer Confidence report on Tuesday and the release of Chicago PMI and Pending Home Sales on Thursday.

Although most traders will be off enjoying their holidays, leaving only their juniors dealers on the desk, it will not be a shortened trading week as it has been in years past because the equity markets will be open for trading on Dec. 31. There is no New Year holiday this year because Dec. 31 falls on the last Friday of the year.

DON’T RULE OUT A BREAKOUT IN FX AFTER CHRISTMAS

However, just because there are only a handful of noteworthy events on the U.S. calendar does not mean currencies will continue to consolidate in the coming week. Friday is the month, quarter and year end for many companies, which mean that there could be a great deal of position adjustments.

We have also found that over the past 10 years, the odds are skewed towards a breakout or expansion in volatility in the forex market the week after Christmas. According to our study, the weekly trading range in the EUR/USD the week after the holiday increased by an average of 80 percent seven out of the past ten years. In USD/JPY, there was an expansion in the trading range eight out of the past 10 years the week after Christmas with the range increasing by an average of 78 percent.

In 2009, for example, USD/JPY fluctuated within a 170-pip trading range during Christmas week and the week after the holiday there was a breakout that caused the trading range to expand by 289 pips. This suggests that thin trading conditions at the year end fuels unusual volatility that lead to breakouts in currencies. As for the potential direction of the breakout, let us consider how the Santa Claus Rally could affect the dollar.

HOW COULD THE SANTA CLAUS RALLY AFFECT THE DOLLAR?

The Santa Claus Rally is a price pattern identified by Jeff Hirsch, the founder of Stock Trader’s Almanac. According to his findings, stocks tend to rally in the week between Christmas and New Years Day. The holiday spirit, reinvestment of bonuses and tax considerations are all reasons investors like to buy stocks at the end of the year.

Since currencies tend to have a strong correlation with equities, we decided to take this same idea and see how it applies to forex. We looked at how the dollar traded between Christmas Eve and the first two days of January and found that the dollar weakened against the euro eight out of the last 10 years during this period with an average rally of 1.1 percent.

Against the Japanese yen, the data is less statistically significant with the dollar weakening only six out of the last 10 years. This means that a rally in equities next week could boost risk appetite, which in turn should help to lift the EUR/USD.

*Read SFO Daily every Monday for more forex market trading ideas.

End of December Markets Review

Prior Two Weeks Dec. 12-24

 

 

Stocks, commodities, and risk currencies have continued rising to two year highs, despite a list of deteriorating fundamentals that includes:

 

·         EU Sovereign Debt/Banking Troubles

 

o    Rising PIIGS bond rates

o    A steady stream of credit downgrade warnings for Portugal and Spain

o    Downgrades for Greece, Ireland, and Hungary

o    Talk of additional Irish bank bailout disbursements to Allied-Irish Bank

 

·         Further Tightening Measures In China To Reduce Inflation and Growth

 

o    Rising Bank Reserve Requirements

o    The second short term rate hike since October

 

 

·         Overall Data From The US, UK, and Japan

·         Ongoing Threats Of War From N. Korea

 

Why? The buying isn’t coming from retail buyers or insiders, both of whom have been selling for months.

Rather it appears that cash continues to come into the markets from assorted US and EU stimulus measures, as central banks buy government bonds from major banks, which in turn put the cash into equities.

 

Looking Ahead: Brief Thoughts On What’s To Come

 

Here’s a brief summary of how the bullish and bearish forces stack up in the coming weeks.

 

 

Bearish

 

• Risk assets at multi-year highs, tepid growth prospects could provide a pretext for year-end profit taking.
• Looking beyond next week, we suspect the weight of bearish forces detailed below put the odds in favor of a pullback in risk assets.
• Low liquidity magnifying any big surprise negative events that cause mass selling of risk assets with few buyers, and buying of safe-haven assets with few sellers. The result – wild price spikes.
• Continued China tightening threatens to slow growth in China, and thus Australia, Canada, and other markets tightly tied to China

Bullish

• Low liquidity magnifying continued stimulus actions in the US
• Possible Santa Claus Rally Continues

Latest China Moves Inspire Fresh Long Position in EUR/AUD Cross

FUNDYS

After seeing some jumpstart action in early Monday trade, most currencies have quickly traded back towards or near daily opening levels. The one minor exception is the Euro which has been relatively well bid across the board and outperforms all currencies. Data on Monday has been scarce with many countries still off for holidays. However, we did manage to see some early UK data with Hometrack house prices released and putting in a sixth straight monthly decline. Japanese data was also out but failed to factor (see below). The big story on the day has undoubtedly been the latest 25bp China rate hike announced on Christmas Day.

Relative Performance Versus USD Monday (As of 11:15GMT)

1. EURO+0.34%
2. CAD +0.16%
3. YEN+0.07%
4. STERLING+0.02%
5. SWISSIE+0.01%
6. AUSSIE-0.11%
7. KIWI-0.16%

Initial market reaction was as to be expected with currencies weighed down, led by the closely correlated Australian Dollar. But lack of any real market presence on the thin trade resulted in some whipsaw price action back towards opening levels. Also seen supporting currencies, was some upbeat rhetoric out from Chinese officials to offset any fears of a slowdown following the latest moves. Australia, New Zealand and the UK markets were all closed on Monday, while many other countries are still unofficially on holiday. As such, we would continue to expect to see some light trade over the course of this week and into the first week of 2011.

Japanese markets were open and the Yen has mostly been consolidating, with a number of economic releases failing to materially factor into price action. Market participants have been less focused on economic releases and instead having been paying attention to the latest political polls which show the disapproval rating for PM Kan’s cabinet rising to an all-time high of 67%. A Nikkei poll confirms general sentiment showing the government approval rating dropping below 30% for the first time.

In our opinion, the moves by China to raise rates are quite significant and from a currency standpoint, should significantly weigh on the Australian Dollar and other commodity currencies over the coming year. The tighter monetary policy will likely slow down growth in China which in turn will curb demand for commodities. As such, we see this as a major theme over the coming year and with the Australian Dollar trading by cyclical highs, we see these China moves acting as the catalyst for the start to a critical bearish trend shift in the antipodean. Our EUR/AUD long trade established today (see “Trade of the Day” below) is already showing promise.

Looking ahead, all is quiet on the economic calendar for the rest of the day, and we mostly expect markets to trade accordingly. We could see a bit more action and volatility into North America in response to the latest China moves, but that should be the only thing that factors into price action. Of course, market participants should always be on the lookout for additional ratings warnings and downgrades on the beleaguered Eurozone economies. UK markets were closed for Boxing Day, while European markets were light. US equity futures are tracking moderately lower, and commodities are mixed with oil slightly offered and gold mildly bid.

TECHS

EUR/USD:The market has mostly been locked in a choppy consolidation over the past several days, but a lower top looks to have carved out by 1.3500, with a break back below 1.2970 over the coming sessions to confirm and open the next major downside extension towards the 1.2585 platform base from August 2010. As such, any intraday rallies towards the 1.3300 area should be used as formidable sell opportunities.

USD/JPY:Despite the latest pullbacks below 83.00, the market still remains confined to a broader consolidation, and while the price holds above the bottom of the Ichimoku cloud, the overall outlook remains constructive with dips towards 82.00 to be used as compelling buy opportunities. A break and close back above 84.50 will however be required to end what is perceived to be a bullish consolidation and accelerate gains. A close below 82.00 on the other hand, would compromise outlook and give reason for pause.

GBP/USD:The market remains under pressure and now seems poised for a retest of the platform base from early September at 1.5295. Daily studies are however looking a little stretched so we would not rule out the possibility for a bit of a bounce over the coming sessions towards the 1.5700 area from where a fresh lower top will be sought out ahead of an eventual drop to challenge and break 1.5295. In the interim, we remain sidelined and await a clearer signal.

USD/CHF: Setbacks have most recently stalled out just shy of the record lows by 0.9460 from October, and with daily studies looking a little stretched, we would expect to see any additional declines very well supported in favor of a major bullish reversal. Cyclical studies continue to warn of a major trend shift at current levels, and a bullish outside day last Thursday after failing to establish fresh record lows, could very well act as the initial catalyst for said reversal. Look for a break back above 0.9735 to confirm and accelerate gains. A break and close back below 0.9460 delays.

TRADE OF THE DAY

EUR/AUD: This is our favorite trade for 2011 in general and with the market trading by fresh multi-year lows and deeply oversold, the risks for a major corrective bounce seem highly probable. We have taken shots over the past few days with no downside, and have once again taken a shot on Monday. The cross has finally stalled out just ahead of major psychological barriers by 1.3000 and any additional declines below this level are not seen as sustainable. Monthly, weekly, and daily studies are all in oversold territory at the same time, and this very rare occurrence should be a red flag for a potential trend change. Fundamentals are also playing their part in the trade, with China hiking rates over the weekend. The move to a more restrictive policy will inevitably slow growth which will in turn weigh on the highly correlated Australian Dollar. POSITION: LONG @1.3070 FOR AN OPEN OBJECTIVE; STOP 1.2970.

Written by Joel Kruger, Technical Currency Strategist for DailyFX.com

Current Currency Rates

Currency Unit	USD per Unit	Units per USD
	USD United States Dollars	1.0000000000	1.0000000000
	EUR Euro	1.3117503904	0.7623401581
	GBP United Kingdom Pounds	1.5444015768	0.6474999864
	CAD Canada Dollars	0.9915225529	1.0085499287
	AUD Australia Dollars	1.0002199852	0.9997800632
	JPY Japan Yen	0.0120743782	82.8199996784
	INR India Rupees	0.0222172859	45.0099983215
	NZD New Zealand Dollars	0.7468500137	1.3389569279
	CHF Switzerland Francs	1.0399334381	0.9616000057
	ZAR South Africa Rand	0.1484230014	6.7375001907