Your Chart is the Body of Proof

Boris Schlossberg

This week when we were Live Trading FOMC I uttered the following words:
“It doesn’t matter what you think.
It only matters what the market thinks.
If the market doesn’t think the way you do
You don’t move”
Not exactly Shakespeare, but like all great ideas it just channeled through me and I thought about it long after the webinar was over.
It seems such a simple thing and yet we almost never follow that rule.
I know I certainly didn’t and often paid a dear price for my arrogance.
But recently I started to watch “Body of Evidence” and suddenly a lightbulb went off in my head…

Well let me tell the story this way

PepperSmaller

AUDCHF to .7370? – Weekly Chart

AUDCHF to .7370? – Weekly Chart

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AUDCHF to .7370? – Weekly Chart

U.S. retail sales may have been the most important event risk on today’s calendar but President Trump’s tweet about China and Russia playing the currency devaluation game puts tensions between the world’s 2 largest economies back into central focus. The Australian dollar is highly sensitive to any pressure on China. The Chinese have been talking about devaluing their currency and if they move forward, it reduces their purchasing power and their demand for Australian exports. We like selling AUD vs. the Swiss Franc because geopolitical tensions are still high and USD/CHF is slipping on the back of softer retail sales.

Technically, lower highs and lower lows signal further weakness in AUD/CHF. The daily chart shows failure at the 100-day SMA and 75 cents while the weekly chart shows significant moving average resistance (50, 100 and 200 SMAs) between .7475 and .7500. We think AUD/CHF could slip as low as the 20-day SMA near .7370

EUR/USD in Play – Chart and Levels

EUR/USD in Play – Chart and Levels

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EUR/USD in Play – Chart and Levels

Thursday’s ECB meeting is one of the most important event risks this week. EURO has been biding its time trading between 1.1235 and 1.1465 pre-ECB. Which end of this range breaks hinges upon Mario Draghi’s tone. If he’s concerned about the strong euro and talks about the possibility of more stimulus, then 1.1235 could give. If he simply says they need more time to see the effects of stimulus and points to recent data improvements as a sign of their easing measures working, euro could make a run for 1.1400. From a data perspective, there’s less for the central bank to worry about in April vs. March when there was significantly more deterioration than improvement in the economy. So the question now is whether the 3 to 6 cent rise (depending where you’re measuring from) in EURO since March rings alarm bells for the central bank.

Technically, the EUR/USD is trading right around its 50-day SMA. A break of the 38.2% Fibonacci retracement would be needed for a near term top and pullback to 1.1150. Otherwise the uptrend remains intact. Resistance is at the April high near 1.1465.

USD/JPY Chart – Sell into the Rally

USD/JPY Chart – Sell into the Rally

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USD/JPY Chart – Sell into the Rally

USD/JPY has been on a wild ride this month. Having dropped over 1000 pips in 2 weeks, the currency pair rebounded more than 400 pips in 3 trading days but fundamentally we believe there’s another round of weakness before stabilization. In the last 24 hours, we’ve seen a strong recovery in risk appetite because investors were relieved that Chinese markets did not open sharply lower. Although China’s trade surplus increased, imports and exports fell significantly, pointing to continued weakness in China’s economy. Japan’s economy also contracted in the fourth quarter, making the rally in the Nikkei overnight undeserved. We believe that Wednesday’s FOMC minutes will remind investors how low the chances are for a rate hike from the Fed next month and this could be just the catalyst that the dollar needs to make another move lower.

Technically, we view the recent rally in USD/JPY as a correction within a broader downtrend. We expect the bounce to exhaust near 115. Not only is this an important psychological level but it is also right at the 100-week SMA. If this level is broken, the spike lows near 115.50 still needs to be broken for a stronger move back towards 117. However if the currency pair resumes its slide, support will found at the 50% Fibonnaci retracement of 1998-2011 move near 111.75.

USD/JPY Levels and Chart

USD/JPY Levels and Chart

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USD/JPY Levels and Chart

This morning we sent out orders to reload our USD/JPY long positions. At the time, we said that we were not worried about Japan’s Yen comments because they are in no position to take steps to halt the decline. Inflation is still very low so currency intervention is not an option especially since Japan is an export dependent economy and therefore has a vested interest in a weak yen. They also are in no place to drive the yen higher with tighter monetary policy. The market already knows that QE will not be increased this year so nothing will come out of today’s comments. At the same time, the US economy is improving and next week the Federal Reserve will tell us that they have moved closer to raising rates. Retail sales are scheduled for release tomorrow and if the data is good, it will revive USD/JPY’s rally. Even if it is weaker, as long as spending exceeds 0.5%, the case is still there for 2015 tightening. Therefore we feel that dollar is headed higher and current levels represent a good opportunity to start scaling in.

Taking a look at the daily chart of USD/JPY, the currency pair has experienced its largest one-day slide this year. There’s support at 122 and 121. If USD/JPY climbs back above 123.30 then the move should extend above 124.00.

GBP/USD 2010 Election Chart

GBP/USD 2010 Election Chart

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GBP/USD 2010 Election Chart

The U.K. general election is a month away but the prospect of a divided government means that sterling could come under serious selling pressure. The best way to look at how GBP/USD could trade going into the May election is to refer back to how the currency pair performed in 2010. This year’s election is similar to 2010 because of the strong possibility of a divided government. What makes it different is the potential power grab by smaller parties that could make it even more difficult for a coalition to be formed. It is almost assured that the Conservative Party will fail to secure enough seats and if this leads to a hung parliament it will translate into more losses for the currency.

Sterling 3 month option volatiles are at a 3-year high but it could rise even further like it did in 2010. Five years ago volatility jumped to 17% in the days after the election and not only did GBP/USD fall 400 pips on election day but it dropped another 500 pips in the 2 weeks that followed. Take a look at the chart below. This chart tells us that rallies in GBP/USD should be sold.

EUR/USD Chart – How We Picked Our Entry Levels

EUR/USD Chart – How We Picked Our Entry Levels

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EUR/USD Chart – How We Picked Our Entry Levels

This morning we issued two sell orders in the EUR/USD and we outlined all of the fundamental reasons why we like the trade. Now we want to take the opportunity to explain why we picked our entries. First and foremost, while the EUR/USD could continue to fall from its current level of 1.0825, we prefer to wait for a bounce to 1.0910 to sell. The market is leaning heavily one direction according to the latest CFTC report and this linear thinking raises the risk of a countertrend move so we rather get a get better entry price than chase the current decline. Also, 1.08 is an important support level created by the convergence of the 10 and 20-day SMA and the currency pair is finding difficult breaking it. Our second entry level is right below the 50-day SMA, indicated by the pink line on the chart and our stop is at 1.1235, right above the 61.8% Fibonacci retracement of the move from the record low to the record high between 2000 and 2008.

Here’s our orders:

Place Order to Sell 1 Lot EUR/USD at 1.0910

Pace Order to Sell 1 More Lot at 1.1127

Stop at 1.1235

EURUSD33016

BK Hot Chart EUR/GBP Headed for 0.7260

BK Hot Chart EUR/GBP Headed for 0.7260

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EUR/GBP Headed for 0.7260

Stronger than anticipated U.K. data and continued uncertainty relating to the Greek debt deal negotiations drove EUR/GBP to a fresh 7 year low. While the currency pair bounced off these levels towards the end of the North American trading session, fundamental forces should continue to press EUR/GBP lower. There are reports that Greece will request an extension to their bailout on Thursday. While the euro could jump on the announcement, the gains will be unsustainable unless there is a quick approval by European officials. It is in Europe’s interest to ensure that a deal is done to avoid the havoc that a Grexit would have on the financial markets and the perception of the irreversibility of the euro. However according to a draft of the bailout extension request obtained by the Financial Times, most of the terms presented are the ones that have already been rejected and therefore unpalatable to the E.U. At the same time, sterling is looking ever more attractive. Stronger U.K. data and slightly more hawkish Bank of England minutes raises the odds of a rate hike this year. Today’s data was good but the icing on the cake was average hourly earnings which rose 2.1% versus a forecast of 1.7%. We have been looking for sterling to outperform on today’s reports and this strength should carry through to the end of the week, when we expect U.K. retail sales to surprise to the upside, putting additional pressure on EUR/GBP.

Technically, breaking below 75 cents has put EUR/GBP on track for a move down to the 61.8% Fibonacci retracement of the 2000 to 2008 rally of 0.7260.

BK Hot Chart – USD/CAD to 1.30?

BK Hot Chart – USD/CAD to 1.30?

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BK Hot Chart – USD/CAD to 1.30?

USD/CAD raced to a high of 1.28 on the back of weaker than expected GDP numbers and while the loonie recovered part of its losses by the end of the North American session, the uptrend remains intact. Over the past month, the currency pair soared over 1000 pips or 8% to its strongest level in 5 years. The initial slide was triggered by a decline in oil prices with the move extending on the back of the Bank of Canada’s surprise rate cut and the move is now exacerbated by weaker economic reports. Each of these goes hand in hand of course because the BoC would not have lowered rates if oil prices had not fallen and the economy had not weakened. Nonetheless, the 0.2% contraction in the month of November drove annualized GDP down to 1.9%, the slowest growth since March. The problem was manufacturing and oil production – which saw its biggest drop in 6 years. Unfortunately next week’s IVEY PMI and employment reports could highlight the same areas of vulnerability in Canada’s economy. If the data is soft like we anticipate, USD/CAD could make a run for 1.30. The only wrinkle is oil. If it finds long term support above $40 a barrel and starts to rise, breaking above $50 a barrel, a top would be on the way for USD/CAD.

Near term support in the currency pair is at 1.25 with more significant support at 1.2380. Taking a look at the monthly chart of USD/CAD the next main area of resistance is at 1.30.

BK Hot Chart – NZD/USD Could Drop to 71 Cents

BK Hot Chart – NZD/USD Could Drop to 71 Cents

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BK Hot Chart – NZD/USD Could Drop to 71 Cents

The New Zealand dollar fell hard on the back of surprisingly dovish tweaks to the Reserve Bank of New Zealand’s monetary policy statement with NZD/USD dropping to its lowest level in 3 years. According to the statement, the decline in oil prices was too much for the RBNZ to bear. The central bank felt that “falling oil prices is causing tradable goods inflation to be very weak.” They also fear that headline annual inflation could turn negative for a period before moving back towards 2%. Combined with an unjustifiably high exchange rate, fiscal consolidation, reduced dairy payout and the risk of draught, the outlook for growth has now changed. Most importantly, they removed the statement about expecting more tightening and replaced it with the comment that rates could move up OR down depending on data. In other words, the RBNZ has shifted from a tightening to neutral monetary policy bias and the New Zealand dollar collapsed in response.

At this point, there is no major support in NZD/USD until the 2011 low of 0.7118. Resistance remains at 75 cents.

What’s Next for NZD/JPY?

What’s Next for NZD/JPY?

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Fundamentals
Its central bank day in FX tomorrow and NZD/JPY could be at the center of the storm as traders get ready for policy makers. On the US side the Fed is expected to pretty much maintain its neutral line as low inflation and laggard wage growth are not going accelerate the normalization schedule. On the other hand the RBNZ has seen growth stabilize and milk prices rise for three consecutive months. Still the central bank may reaffirm its neutral stance in which case NZD/JPY could get whacked from both ends as the disappointment from the Fed and RBNZ push the pair lower.

Technicals
Technically the 87.00 is key support for the pair and break there opens a run towards 85.00. On the other hand a close above 89.00 would suggest that the pair has found firm support and may be ready to rally

BK Hot Chart – USD/JPY Upside

BK Hot Chart – USD/JPY Upside

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BK Hot Chart – USD/JPY Upside

For the time being USD/JPY appears to be stuck within a narrow 117.20 to 118.85 range but from a fundamental and technical perspective, the uptrend remains intact. As the Northeast hunkers down for a major snowstorm, forex traders around the world are turning their eyes to the upcoming Federal Reserve monetary policy announcement. While recent stimulus from the ECB and other central banks gives the Fed more leeway, we do not believe they will alter their forward guidance having just changed it in mid-December. If you recall, last month, the Fed replaced its vow to keep rates near zero for a “considerable time” with a pledge to be “patient” on the timing of the first rate hike. At the time, this was viewed as such a hawkish shift that it drove USD/JPY from a low of 116.30 to a high of 120.80 in a matter of days. There has been a few weak data points since the last Fed meeting, most notably retail sales and average hourly earnings but this follows many months of positive economic surprises. The Fed also believes that the decline in oil prices will pick up the slack. If they dialed back their hawkishness, it would risk undermining credibility. The next big meeting is in March so there’s no need to rush any changes. If we are right and the Fed provides no fresh insight at this week’s meeting, their tightening bias will make the dollar more attractive and drive USD/JPY higher.

Technically, there is short-term support at 117.15 and more significant support at 115.57. The 61.8% Fibonacci retracement of the 1998 to 2011 decline at 120.18 will cap gains for the time being.