EU group and FinMin meetings to start the trading week
Don't these people have any respect for the beginning of the Karneval period? There will be lots of chat about Greece at today's EU meeting and the market does not expect the next tranche of Greek aid to be approved. This suggests to me that there may be some topside risk for the EUR later today, if the EU group meeting comes out with a surprising approval?
Basically everything depends on where the next batch of trailing stops is; probably above 1.2790 in EUR/USD and above 101.80 in EUR/JPY (I'm guessing here, I have no exact info yet).
AUD/USD orders update
Light sell orders reported at 1.0450 although I hear unconfirmed reports of stops above 1.0440. More sell orders at 1.0480.
AUD/JPY edges higher in light trade
Risk sentiment is improving slightly for all the reasons mentioned below. AUD/JPY is edging higher with this sentiment and dealers say that interest is pretty low.
EUR bulls feeling slightly more confident
With the Greek vote now done and the prospect of Sovereign bids below 1.2700, not to mention higher equity markets, EUR/USD bulls have every reason to feel slightly more confident. Don't expect any huge rallies, anything above 1.2750 will attract sellers.
Quick look at the order boards
- USD/JPY: Barrier protection ahead of 79.00:
- EUR/USD: Sovereign buyers reported on Friday below 1.2700:
- AUD/USD: Reserve managers reportedly buying near 1.0350:
The day ahead in the FX market, Monday November 12th
- Economic calendar is fairly light during Asian trade; Japanese GDP and their tertiary industry index are important releases but the currency market usually ignores them:
- China's trade surplus for October was much better than expected at $32 billion and this should shape risk-sentiment during Asian trade:
- Wall Street rebounded somewhat on Friday which should also boost regional equity markets:
- EUR/USD: Fell on more Greek worries but Asian central bank bids helped stall losses below 1.2700. Main levels to watch, 100-day MA near 1.2630 and prior lows near 1.2805:
- AUD/USD: Should find support from improved risk sentiment and reserve manager bids at 1.0350. Initial resistance, hourly highs at 1.0440:
- USD/JPY: Large barrier at 79.00 with institutional bids ahead of there. Resistance should be firm 79.90/80.00:
AUD/USD: Outlook for the week ahead
I'm still short and overall bearish on this pair but with reserve managers still reportedly buying dips, and with the technical outlook still favouring sideways trading, I think we may be in for further range trade between 1.0150 and 1.0600. I've lightened my position at 1.0386 and 1.0370, and will wait for silly moves in either direction before adjusting again. AUD/JPY will also be worth watching, with important support on the daily chart between 81.60/82.00, and a break below there will have the bears back in charge.
The economic calendar is light this week so we will look to risk sentiment, equity and commodity markets, and institutional flows for short-term leads.
EUR/USD: Outlook for the week ahead
The EUR crosses remain quite heavy overall, with EUR/JPY definitely turning bearish and EUR/GBP also losing its bullish momentum, and this sentiment is making it hard for the EUR/USD to make any significant bounces. More losses look possible from a technical perspective, but remember that this pair has been entrenched in range-trading mode so the market is lacking confidence and therefore we will see nasty dips and spikes against the short-term trend. Overall, I prefer the sell-rally strategy here but we could be trading 1.24/1.30 for the rest of the year.
The German ZEW survey and industrial production data, as well as EU CPI and the FinMin meeting will be the main risk events during European trading sessions.
USD/JPY: Outlook for the week ahead
There's little doubt in my mind that the risk-reward ratio is heavily in favour of the bears here, for all the reasons I outlined last week (primarily market positioning). The hourly chart has also turned bearish and although it may stall at the 38.2% retracement level, I'd much prefer to be entering the market near 79.90. I'm still running a short trade here (which you can follow in the members section) and I'm hoping to increase the position size near that level.
The economic calendar brings GDP and industrial production to begin the week as well as a speech by BOF chief's Shirakawa, but the big influence here will be brought by external factors and market sentiment.
German Economics Ministry: German growth to weaken further in winter
The EUR took another small hit on that headline but bids at 1.2725 haven't yet been tested.
That's it from me for the week. I'm basically staying short AUD/JPY through the legs (AUD/USD and USD/JPY) which allows me a bit more trading scope. Have a great weekend and catch you on Monday++
USD/JPY: Barrier protection at 79.00
Lots of talk of big bids and barrier protection ahead of 79.00 but I'm still short and happy to stay that way. I think USD/JPY will now stay below 80.00 and I expect to see 78.50ish early next week.
Risk sentiment soggy in early Europe
EUR/JPY has fallen 50 pips already in early European trade and liquidity is still quite poor according to early European interbank reports. Let's hope that Christmas markets aren't starting super early. Earlier reports suggested that USD/JPY should find plentiful support near 79.25 and that EUR/USD bids are plentiful near 1.2725, so that should give EUR/JPY some support. Hourly lows at 101.00 in the cross are currently being tested.
Cable: Cheap day-trade idea
As expected, Europe walks in and promptly unwinds whatever moves happen in Asia. Nevertheless there is a nice base forming on the short term charts, so a cheap day trade might be to buy cable at 1.5970 with a stop-loss below 1.5950, selling half at 1.6010 and keeping the other half open. Just a thought.
Orders pretty light across the board
Dealers say that only USD/JPY is showing any sign of decent order activity, with solid buy orders at 79.25, 791.0 and 79.00, and stop-loss sell orders also reported below 79.00.
EUR/USD is a mixed bag on both sides and on the crosses, some large EUR/GBP bids are reported near .7925.
Chinese data puts another nail in Australian rate-cut coffin
If the RBA isn't worried about the level of the AUD, and they obviously aren't based on their last meeting, then the chances of a rate cut next month are receding at a great rate. Very strong retail sales and industrial production data out of China when coupled with yesterday's strong Australian jobs data, would seem to be taking away any chance of a 25 bps rate cut in December.
The AUD has bounced across the board this afternoon and with overall positioning at close to neutral levels, there is plenty of scope for positions to be built in either direction.
Why do dealers target stops?
I've been asked again, ‘why do dealers target stops?’.
Lets look at an example of an interbank dealer who is looking at his order book and sees stop-loss orders to buy 200 million EUR/USD at rates above 1.2900 up to 1.2910. The current rate is 1.2850 say. He has some options:
Option 1. He does nothing. He waits until the market breaks above 1.2900 and only then does he begin buying. The obvious problem in taking this course of action is that other dealers have similar orders and the market gets fast above the level. The customers who placed the stops will face excessive slippage and they will not be happy, plus the dealer doesn't earn anything. All up a bad result.
Option 2. He buys smalls at 1.2850. The market starts edging higher so he buys another 20 or 30 (if the market goes down he cuts the position for a small-ish loss but the art of the dealer is being able to read the market and sense the weak side). He may sell some out on rallies as he averages his positions, but he keeps himself 20 or 30 long. Lets say his average entry rate for the 30 long is at 1.2870. When the market breaks above 1.2890, he buys more and then he buys large amounts at 1.2900 to ensure that the market trades at a rate above 1.2900, thereby ensuring that the stop-loss order is to be filled. Then he buys the balance of the orders. He will have bought 200 EUR/USD at an average rate of 1.2891 say. He will fill the stop-loss buy orders on average at 1.2903, with each customer being filled at close to their stipulated stop-loss level. The dealer will have ensured that the customers cannot complain about slippage and at the same time he’ll have earned $240,000+.
All dealers worth their salt will follow 'Option 2' which actually means that all stops are targeted.
There is sometimes a downside risk in that the dealer may buy large amounts but the market suddenly stalls at 1.2900 due to a barrier or a big Sovereign or corporate seller and they cannot get through to actually trigger the stop. If this happens the dealer must act very quickly to start exiting his position before the market turns lower. So there is some risk to the dealer. There have even been cases where customers left huge stop-loss buy orders above the market, but they were in fact trying to sell! They leave a huge stop-loss order with one bank, this bank starts buying aggressively, the customer then sells into the rally through a third bank and then cancels the stop-loss order, leaving Bank 1 high and dry. (Are you feeling sorry for the banks yet?).
Quick overview of Asian market
- Market triggered AUD/USD trailing stops below 1.0390 but failed to trigger larger stops below 1.0380 and dealers were forced to cover:
- Better than expected Chinese economic data led to further short-covering in later trade:
- Bank of Korea left rates unchanged as expected:
- EUR/USD stops above 1.2780 were triggered in very thin trading conditions:
- USD/JPY hardly moved from 79.50:
- AUD/USD rallied 50 pips from earlier lows on pre-weekend short-covering:
- Regional stocks fell by 0.5% on average but Gold continues to glitter at $1737/oz:
- Dealers report illiquid trading conditions with few major limit orders (but plenty of stops!).