Major Currencies Challenge Recent Trends - Where to From Here?

Written by DailyFX |  Feb 23 09 15:04 GMT | 

Forex markets appear poised for a major stress test of recent market trends. Last week, the heretofore iron-clad correlation between risk sentiment and the Japanese Yen began to show signs of breaking down after the world's second-largest economy issued the worst GDP reading since the 1970s. Now, the US Dollar is threatening to confirm a double top as prices test below key near-term support. Looking ahead, a busy economic calendar is set to be compounded by plans for US President Obama set to make a series of high-profile economic strategy annoucements. Our DailyFX analysts weigh in and reveal their top picks for how to play what is sure to be a volatile week ahead.

Chief Strategist
Antonio Sousa

My picks: Sell High-Yielding Commodity Currencies

Expertise: Global Macro

Average Time Frame of Trades: 1 month

If just one year ago, I had told you that the U.S. government could nationalize Citigroup or Bank of America, one could easily say that I had lost my mind. However, given the ongoing deterioration of the financial system, Citigroup and Bank of America are among more than 20 lenders that could become majority-owned by the U.S. government if the Obama administration decides to convert preferred shares into common equity. This is scary stuff! First, the government is allocating resources from tax-payers into non-performing firms. Eventually, this will have a terrible impact on long-term growth expectations. In addition, instead of minimizing the impacts of the ongoing deterioration of the global economy, politicians are making it worst by implementing “Buy American” protectionist measures that can easily trigger a trade war. So, given the current global macro environment, one should expect additional pressure on export dependent countries and we think some currencies will be particularly vulnerable going forward. Having said that, I will be looking for opportunities to buy safe-heaven currencies like the U.S. dollar against high yielding commodity currencies like the Canadian dollar, Australian Dollar or New Zealand dollar.

Senior Currency Strategist
Jamie Saettele

My picks: long EURUSD, against 1.25, targets 1.33 and 1.37

Expertise: Technical

Average Time Frame of Trades:

Finally, the EURUSD appears to have put in a solid bottom. After weeks of brutal choppy action in what was a triangle, the EURUSD broke lower. However, triangles lead to terminal thrusts. In other words, moves from triangles complete a larger move in that same direction. In this case, the break below 1.27 completed 5 waves down from 1.4723. A corrective advance over the next month (at least) is expected. Initial resistance is not until 1.33 (former chart resistance and 38.2% of decline from 1.4723). Support next begins at 1.2740.

Currency Strategist
Terri Belkas

My picks: Long EUR/JPY

Expertise: Fundamentals Combined With Technicals

Average Time Frame of Trades: 1 Day - 1 Week

EUR/JPY finally rose above trendline resistance at approximately 118.50, which was a make-or-break level in my book. Unfortunately, I had been looking for the pair to hold below that level, which led to my short EUR/JPY position getting stopped out. Now that price has clearly broken above, I am looking to initiate a long EUR/JPY position, which I intend to hold on a longer-term basis than many of my other trades. In order to accomodate for the choppy price action we've been seeing lately, stops will need to be placed below rising trendline support (connecting the mid-January - mid-February lows) at 116.50. Initial targets may be placed near the top of the pair's trading range since November at approximately 129.10/75, while secondary targets sit at the 38.2% fib of 169.51-112.10 at 133.96.

Currency Analyst
Ilya Spivak

My picks: Remain Short EURUSD

Expertise: Global Macro, Classic Technical Analysis

Average Time Frame of Trades: 1 week - 6 months

I first sold the Euro against the US dollar at 1.5510 and have been holding short since, expecting the emergence of a long-term down trend. The pair ended last week on a high note to test the upper boundary of a falling channel that has contained prices since mid-January. Considering the fundamentals, this move looks corrective: in the short to medium term, the dollar is likely to continue to benefit as investors expect the US economy's lead in entering the current crisis to be matched by a lead in the recovery; in the longer term, eroding trading terms in the Eurozone coupled with an improving trade position in the US will see EURUSD remain under selling pressure. Remain short, expecting a return to downward momentum to break to take the pair below 1.26 to test support at the bottom of the range that contained the pair from 10/22/08 - 11/10/08.

Currency Analyst
John Rivera

My picks:Short EUR/USD

Expertise: Fundamentals Combined With Technicals

Average Time Frame of Trades: 2-4 Days

My GBP/JPY breakout trade never materialized as the pair continues to trade near the 20-day and 50-day SMA. Although, we are seeing a test of the 50-Day SMA today which could lead to the breakout I was expecting. However, I am going away from the pair today as I am seeing an opportunity to short the Euro/Dollar after the it failed to break above the 20-Day SMA for a third time. The two prior failures lead to a Euro sell off of more than 200 pips. Therefore, I am looking for a retrace back to 1.2500.

Currency Analyst
Joel S. Kruger

My picks: Short USD/JPY @94.70 for 92.55 Objective, Stop @95.70

Expertise: Technical Analysis

Average Time Frame of Trades: 1-3 Days

Friday’s bearish reversal day has now been negated with the market rallying back to finally clear critical resistance at 94.60, the 2009 high and neckline of a major double bottom. However, while the pair trades at or near 94.60, the overall structure still remains grossly bearish and at a minimum, we would need to see a sustained break above 94.60 to confirm a material base and suggest a legitimate reversal in the trend. Daily studies have begun to look stretched and with stochastics already overbought and the RSI on the verge, we favor a scenario in which the 94.60 level will be cleared with limited additional upside, before the pair ultimately reverses course for bear trend resumption. We contend that even if today’s break of 94.60 should signal a shift in the trend, the overbought daily studies would more likely than not open a short-term pullback before the market would even consider a fresh upside extension back above 94.60 and beyond.


DailyFX