EUR/CAD Long Position Established @1.3192; Stop Moved to Break-Even

FUNDYS

Any weakness in the buck in the previous week of lightened holiday trade is being attributed to some stop hunting and end of year flows in the illiquid market. Already in early 2011, we are seeing the US Dollar come back into favor with the Euro erasing Friday’s gains and breaking back below Friday’s low to set up a bearish reversal day. All of the major currencies have pulled back from their respective recent highs against the Dollar, and we could very well see the Greenback come back into favor as market participants are reminded of the recovering US economy and potential for a shift in Fed monetary policy towards a less accommodative bias.

Relative Performance Versus USD Monday (As of 11:00GMT)

1. CAD+0.49%
2. SWISSIE -0.09%
3. AUSSIE-0.25%
4. KIWI-0.29%
5. YEN-0.36%
6. EURO-0.48%
7. STERLING-0.94%

Predictions from IMF Blanchard who calls for a “two-speed” economic recovery in 2011 and beyond, along with comments from Center for Economics and Business Research CEO that this could be the year when the Euro weakens substantially towards parity with the USD, are further supportive of the positive outlook for the US Dollar in 2011. Meanwhile, we see ongoing risks to the Eurozone given the enormous debt burden from the peripherals, continued stress in the UK economy on shaky unemployment and softer retail sales, and potential exposure to the commodity bloc as China begins to slow down in reaction to tightening of monetary policy.

There is one currency that does however stand out in Monday trade, and that is the Canadian Dollar. The single currency had been a relative underperformer in the previous week when all of the currencies were rallying against the buck, and it appears now that these currencies have finally decided to sell off a bit, Cad is all of a sudden rallying. I guess that is why it is called the Loonie. Usd/Cad has broken to fresh multi-month lows, and has been threatening to establish below next key figure support by 0.9900. However, the price action seems more than a little odd to us, and given our longer-term core outlook for the Canadian Dollar, we view any dips below parity as unsustainable for any meaningful duration. In an attempt to take advantage of what we believe to be some less than reliable price action, we have gone ahead and established a fresh long position in Eur/Cad.

On the data front, it was all about PMIs with Swiss PMI coming in weaker than expected, German PMI around consensus and Eurozone PMI better than forecast. All else was fairly quiet and the UK holiday closure definitely contributed to the lacklustre European session. There was some focus on European equity markets which jumped out to a strong open in 2011, but this failed to materially factor into FX.

As far as our strategy and trading is concerned in 2011, we are very excited and will be making an effort to publish our open positions and account summary on a daily basis. All of our positions will be traded on an unleveraged basis, which means that the position size of each trade will be equal (or as equal as possible) to the size of the account. Therefore, if our account is set to $10,000, then the position size for each trade will be $10,000 or 10k. This will allow us to trade in a very calm relaxed and thought out manner, and give us every chance to look to reach our end of year target objective of returns in excess of 10%.

The goal is to trade in a way that will keep us in the game for the long run and give us the confidence to keep doing so, so that we can benefit from the wonderful opportunities the market offers on a day in and day out basis. We will try and look for trading opportunities every day, but if nothing sets up on a given day, we will happily go to sleep and look forward to opportunities on the next day. The market is not going anywhere and will always be waiting there for us the following day.

Looking ahead, data in the North American session is all out of the US, with ISM manufacturing (57.0 expected) and construction spending (0.2% expected) due out at 15:00GMT. US equity futures are well bid, led by gains in the Nasdaq which tracks higher by 0.85%. Meanwhile, oil is very well bid, while gold trades flat.

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 above 1.3400 should be used as formidable sell opportunities. Only a close back above 1.3500 negates bearish outlook. Monday’s break back below Friday’s low sets up a potential bearish reversal day and encourages bias.

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 recent 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 however 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. But the latest topside failure ahead of 1.5700 is encouraging.

USD/CHF: The latest price action is certainly concerning for our basing outlook with the market dropping to fresh record lows by 0.9300 thus far. However, cyclical studies are showing oversold and any additional declines below 0.9300 are not seen as sustainable. Our strategy is to continue to take shots at buying on extreme intraday dips, but ultimately, look for a break back and close back above 0.9400 to confirm short-term reversal and relieve immediate downside pressures.

TRADE OF THE DAY

EUR/CAD:This morning we noticed some gross underperformance in the cross, with the Canadian Dollar price action standing out as Cad rallied across the board, while all other currencies were showing weaker against the USD. With the market dropping sharply in Asia to already exceed its daily ATR, and with no decent fundamental catalyst for the move, we were quite content on kicking off the year with a long position on the cross which was well oversold on the hourly chart. The downside risk initially seemed to be very limited, and with the other Euro/Commodity crosses showing evidence of basing, we initiated the trade. From here, a break back above Friday’s 1.3380 highs will be required to officially relieve short-term downside pressures, but we have already taken advantage of the most recent bounce into the money and have gone ahead and eliminated any risk by moving our stop-loss to break-even. POSITION: LONG @1.3192 FOR AN OPEN OBJECTIVE; REVISED STOP @1.3192.