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September 7, 2012September 7, 2012

Aussie and Kiwi Diverge

The New Zealand dollar weakened for a month and rallied the $GBPNZD to the big time 2.00 psychological level. Despite the breakout higher to 2.0050, price formed a double top at this level. Earlier this week, I stated my wariness with this sterling rally versus NZD. Kiwi fundamentals looked good on this rally. In fact, this impressive looking $GBPNZD rally was only a correction. With the 50% Fibonacci level at 2.00 holding, this pullback could make its way to new lows. Today’s break below 1.9750 signals a move lower still to 1.9500.

In contract, the Australian dollar is still fundamentally weak. Iron ore and copper prices are still at low levels. The global economy is still slowing. This sudden wave of bullishness didn’t change those things. The recent $GBPAUD rally was a breakout not a correction like the $GBPNZD. To me, this wk’s rally in AUD is just a correction. Now we are starting to see this divergence in fundamentals play out versus the GBP. This may only be the beginning. Trade what you see.

Disclosure: Short $GBPNZD

September 3, 2012September 8, 2012

The Quiet Kiwi

The NZD trades in the shadow of the almighty AUD and the more familiar CAD thanks to its proximity to the US. While the NZD is a commodity play, it is not a play on energy like the AUD and CAD, but on foods like dairy and cattle. Even as inflation has edged lower in many countries, food prices remain stubbornly high. The high prices in these and other agricultural commodities have gripped the NZD in a bull rally for much of 2012.

The $GBPNZD enjoyed an incredible rally in the 1st half of the year. So it seemed natural that a pullback occurred off the key resistance level of 2.10. But when the $GBPNZD broke below the major psychological level at 2.00, price broke down to new lows at 1.47. Since that low, price has marched higher. Last week, price staged a breakout above the previous high at 1.9825.

The new week open has seen price gap higher to a high of 1.9880. The pair is firmly bullish to open the new week. The key level this week is 1.9750. If $GBPNZD remains supported above 1.9750, price targets a move above 2.00. A close below 1.9750 sees price move lower below 1.95. Because the fundamentals still look strong, it will be interesting how price behaves at the 2.00 level which is also the 50% Fibonacci level of the entire breakdown. Trade what you see.

Disclosure: No position

September 2, 2012

Aussie Bears

AUD bulls have enjoyed quite a rally since May 2012. However surprising to me, the market has determined that the AUD will no longer benefit from high-priced commodities due to a slowdown in demand. This sagging demand has begun to weaken prices. We find this evidence as over the past several months we have seen inflation tick down in many countries. David Bassanese writes that,

the mining boom is not over, to be sure, but its contribution to growth is waning and should go into reverse in around a year’s time…I am also warming to the view that the transition back to the non-mining sectors will need to be aided by much lower official interest rates – potentially another one percentage point cut in the coming year…

In anticipation of a slowing economy and rate cuts from the RBA, the market has turned decidedly bearish on the Australian dollar. And this is just the beginning of the new trend. Since the bottom at 1.4700 in July, the AUD has weakened tremendously against the GBP as it heads lower across the board. The $AUDUSD and $EURAUD have also breached key levels at 1.05 and 1.20 respectively. Both pairs closed the week well beyond those levels. The $GBPAUD was no different. After serving as key resistance, this week’s break above 1.5250 led to a breakout of over 150 pips. $GBPAUD ended the week well above 1.5250 and remains bullish to open the week. However, price could chop around 1.55. A daily close above 1.5750 targets 1.60. A close below 1.55 targets 1.5250. Trade what you see.

Disclosure: Long $GBPAUD

August 26, 2012

Cable Closes Bullish

So my 1st full week back in the markets was treated by a long-awaited breakout in the $GBPUSD.

The breakout above 1.58 to 1.5900 still needed confirmation. We have been faked out by cable’s breakouts before. But this week’s breakout actually looks for real.

1. The Fed

The Federal Reserve has been very vocal about adding another round of QE to the markets. The Fed meeting minutes released this week confirmed this. In fact, during Friday’s session, a letter from Bernanke hit the newswires. This letter confirmed and justified more QE from the Fed Chairman himself. QE is always dovish and the USD has taken a hit every time the market anticipates any QE from the Fed. This time is no exception.

2. 1.5800

1.5800 has been a very key level for the past year. Whether price is trading above and finding support or trading below and finding resistance, action around this price level has been historically indicative of further direction. To close the week above 1.5800 is a very bullish technical signal from the $GBPUSD.

Last week, I was very skeptical of cable’s rise. Even as it staged a breakout, sterling’s fundamentals kept me wary. However, now that we have had technical confirmation with this bullish weekly close, I trust the charts to support this breakout back towards 1.6000. The only thing that changes this bullish view this week is a daily (or weekly) close below 1.5750. Trade what you see!

August 22, 2012September 18, 2012

Cable Breaks Range

After watching cable remain rangebound all summer, the market used the Federal Reserve as a reason to weaken the USD further. As a result, the $GBPUSD broke its range to the upside. Traders know this to be a bullish signal but I am skeptical of this rally.

1. The Bank of England

The BoE is also very dovish. It, too, has signaled more QE is coming. That’s QE4 folks.

2. UK Economy

The British economy was the first of the G10 to slip back into recession when it did so in the Q1 2012. The Olympics may give the economy a welcomed bump, it will be temporary rather than a kickstart to a recovery.

3. The Eurozone

The UK’s biggest trading partner remains on the brink of financial collapse. To boot, the Eurozone countries are also falling into recession one by one and suffering staggering unemployment.

So the GBP fundamentals are very weak. But the market is all about the USD for the moment. And for that reason, $GBPUSD can go higher. In fact, the bullish close 60+ pips above the key 1.5800 level confirms a technical breakout has occurred. However, follow through could be hampered by the big 61.8% Fibonacci level on the daily chart. Will this breakout turn into a fakeout? It is still a very real possibility. Like I said, I’m skeptical. But trade what you see!

August 21, 2012August 21, 2012

Trust The Chart

While this move higher into 1.5800 has peaked a lot of interest, $GBPUSD still closes below the key resistance level. Cable remains rangebound. It looks like a big move but she has yet to prove herself. I love how 50 puts it this morning

euro and cable, just a reminder > price tends to not only move in one direction 😉 focus on the levels and bigger picture #forex $$

— 50 Pips (@50Pips) August 22, 2012

Trust the chart. And this is why I love StockTwits because that wise nugget comes through to keep things in perspective. Because I actually understand the bulls. It seems the market expects a dovish move from the Fed. I am more skeptical but that doesn’t matter. All that matters today is the market’s reaction to the Fed minutes. If they support the market’s notion for a QE move in September then a breakout could be imminent.

But it is still summer. Trust the chart. The $GBPUSD has yet to become bullish after yesterday’s big move. Not very constructive as the market awaits the release of the Fed minutes. Trade what you see.

August 19, 2012August 19, 2012

It’s Still Summer

Vacation is over. Kids head back to school this week. It’s back to business. My family is excited for the routine to return. I’m sure traders are too. It’s been a slow-moving, rangebound market.

While vacation may be over, it is still summer. And the $GBPUSD has been rangebound all summer. It’s been a choppy range though. Channel traders who stuck through it profited very nicely. Showing the kids a good time this summer, I mostly watched from the sideline shaking my head. There were days that the market didn’t even move. There were days it moved 70 pips. $GBPUSD typically has an ATR of 150+ pips. In a trending market, cable can be a thing of beauty. But it is summer. And the long term downtrend has consolidated into a nice-looking channel.

But it takes trust to trade the channel. Given the state of the market right now, it’s hard to trust this market. But with several more weeks left of summer, there is little reason for $GBPUSD to move beyond 1.5800 to the upside and 1.5300 to the downside. As traders play the range, we take care not to get lulled by the lazy days of summer. Rather, sentiment is cautious. Will cable actually follow through on its range break? Because eventually the range will break. Until then, we trade what we see.

July 20, 2012

The Temperamental USD

The USD has threatened to rally for months now. But the $GBPUSD remains in its 300-pip range between 1.5500 and 1.5800. Every time traders, and I do mean ME, gets bullish or bearish due to price action, the USD finds a way to do just the opposite.

For example, despite completing the quarter to 1.5750 on USD ($DX_F) weakness this week, cable never broke above the level to challenge the highs at 1.5800 midterm support and resistance. I was bullish cable going into this trading session. I thought price would continue to rally into 1.5750 – 1.5800 zone and then experience a sharp selloff. The selloff came sooner than expected when risk aversion kicked in as Spanish bond yields and equities spooked the market

So what happens next week? With Spanish (and Italian) yields hitting these high rates at the end of the European session, we can expect the USD to continue to rally when the market opens in Monday trading causing this “Strong USD, Strong GBP” theme to play out once again. As such, this week’s GBP bears should enjoy some profits heading into the weekend. $GBPNZD and $GBPAUD short positions, in particular, paid out nicely this week with continuations in the weak sterling vs. commodities trend. However, do not underestimate this USD. It still rules capital flows and when it is strong on risk aversion fever, GBP will also benefit in the crosses. Most notably, the $EURGBP, $GBPNZD, and $GBPCAD are strong candidates into next week. Trade what YOU see!

EURGBP DAILY — Looking for 0.7800 to hold on a bounce

GBPNZD DAILY — This week’s hold above 1.95 despite kiwi rally looks very good for bulls

GBPCAD DAILY — A close above 1.58 supported by the 61.8 Fib gives some life to bulls

July 13, 2012

Commodities Still Strong Against Sterling

BoE easing and QE increases have been dovish for sterling. $GBPNZD and $GBPAUD have staged reversals that has dragged the $GBPCAD right along with it. The GBP breakout against the commodity dollars in the Q1 of this year was all but undone during Q2.

After breaking key levels, all 3 pairs are at lows to end the week. No interest in new entries here. Watch for profit-taking to end the week but it is more likely that sellers will be holding their positions for new lows in the short term.

Despite the current weakness in commodities versus the US dollar, the rally in the commodity dollars versus sterling continues to advance. It seems to me that commodities bears shouldn’t get too comfortable. While the USD is likely benefiting from an on-hold Fed while other central banks are cutting rates, commodities may find strength again when the Fed does also move on monetary policy. And the China and global slowdown theory is overblown. While China rates are lower-than-expected, 7% growth in an economy is still ridiculously fantastic. Especially when there is no growth in the UK and only 1.9% in the US. China and other fast-growing economies will likely continue to demand commodities at decent rates to keep prices ultimately higher. Food prices around the world are still very high even as oil dropped nicely. When commodities finally turn and rally again versus the USD, it is more likely that the current bear trend in $GBPNZD, $GBPAUD, $GBPCAD will only steepen and continue the mid term bear trend.

July 4, 2012July 4, 2012

GBP/USD Sets Up

Cable is setting up ahead of the Bank of England decision tomorrow and Friday’s US jobs report. Both releases have impact on both sides of this currency pair so I always find it interesting to look at where the pair trades ahead of these back-to-back releases. Despite the overshoot break below 1.5500, the 61.8% Fib held to see cable rally back to 1.5700. With price exhausting at the whole number, a weak sterling has taken $GBPUSD lower into the zone between 1.5575 and 1.5600. This move lower technically gives bulls a nice buying opportunity. However given the event risk over the next 2 days, traders should assess their risk accordingly ahead of the BoE and NFP.

If cable closes the week above 1.5500, the pair remains bullish and favors a move back into the major 1.5800 support-turned-resistance level. A move into 1.5500 still remains a buying opportunity unless $GBPUSD closes out the week below the major psychological level. At current levels, it is still all about 1.5500.