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Forex: Don't Rule Out a Breakout After Christmas

Last updated 12/24/2009 2:33 PM ET (GMT -5) 0 Comments - Add your comment

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Kathy Lien

Director of Currency Research, GFT

THE STORIES IN THE CURRENCY MARKET

• FOREX: DON’T RULE OUT A BREAKOUT AFTER CHRISTMAS
• EUR: GREEK PARLIAMENT APPROVES AUSTERITY BUDGET
• GBP: UNABLE TO RALLY
• AUD: COULD BE POISED FOR MORE LOSSES
• CAD: FOUR DAY STREAK ENDS
• NZD: GOLD AND OIL PRICES REBOUND
• JPY: BOJ OFFICIALS STILL WORRIED ABOUT RISKS

EXPECTATIONS FOR UPCOMING FED MEETINGS

FOREX: DON’T RULE OUT A BREAKOUT AFTER CHRISTMAS

U.S. equity markets ended the day at year to date highs, but the performance of the dollar on Christmas Eve has been mixed. The greenback retreated against the euro, Japanese Yen, Australian and New Zealand dollars, was unchanged against the pound but strengthened against the Canadian dollar.

It has been an extremely quiet week in the currency market with the EUR/USD contained within a 200 pip trading range and USD/JPY within a 170 pip range. On Monday, we published an article titled Forex: The Reality of Thin Holiday Trading and within that article we talked about how the average trading range this week is normally 25 to 50 percent lower than the average weekly trading of 263 pips in the EUR/USD and 247 pips in USD/JPY. Given that this has held true in 2009 as well, we thought it would be interesting to see if the volatility in the currency market next week remains below average. Interestingly enough, we have found that over the past 10 years, the odds are skewed towards a breakout or expansion in volatility the week after Christmas. As indicated in the following 2 charts, the weekly range in the EUR/USD was greater than the average weekly range 7 out of the past 10 years while the range in USD/JPY was greater than average 6 out of the past 10 years. This means that traders should not rule out a breakout next week as thin trading conditions in the year end could fuel unusual volatility.  As for the direction of the breakout, a look at h ow the dollar typically trades in the 7 days between Christmas Eve and the first two days of trading in January indicates that the odds favor dollar weakness. In our article on How the Santa Claus Rally Could Affect the Dollar , we found that the greenback weakened against the euro 8 out of the last 10 years and weakened against the Japanese Yen 7 out of the last 10 years during this period.

The barrage of stronger economic reports today also helped the dollar recover its earlier losses. Durable goods orders rose 0.2 percent last month which was weaker than the market's 0.6 percent forecast but stronger than the 0.6 percent decline in October. Orders for core durable goods which exclude civilian planes and defense capital goods rose 0.2 percent, nearly doubling market expectations.   The strongest demand was for computers and electronic products which are typically hot items during the holidays. Jobless claims also fell from 480k to 452k for the week ending on December 18th, pushing the 4 week moving average down to 465.3k from 468k.   Since this is the lowest level that we've seen claims at since September 2008 and it drives down average claims in the month of December, next month's non-farm payrolls report may not see as steep of a rise in job losses as some people may expect. Continuing claims also dropped from 5.203 million to 5.076 million which would normally be encouraging but given that the U.S. economy is still facing net job losses, the improvement most likely reflects the expiration of unemployment benefits. Foreign exchange markets are closed on Friday and in the new week, U.S. traders will be keying off house prices, consumer confidence and Chicago PMI. 

EUR: GREEK PARLIAMENT APPROVES AUSTERITY BUDGET

The EUR/USD continued to rebound off the 1.4185/90 level mentioned earlier this week. However like ice cubes melting in a hand, the gains are slipping quickly. The European economic calendar has been very quiet with only the release of French employment numbers today.  In the month of November, the number of jobseekers rose by a mere 3,100 people. Earlier gains in the euro was spurred by news that the Greek Parliament has approved a so-called “austerity budget” which aims to reduce the deficit to GDP ratio from an estimated 12.7 percent to 9.1 percent in 2010. This is the nation’s first step towards solving their fiscal problems and boosting their creditworthiness.   Earlier this month, concerns about deteriorating finances have prompted a sovereign debt downgrade by Standard & Poor’s and Fitch. Although the Greek proposal falls short of the ambitious plans by Ireland, the nation is headed in the right direction. Next week, the European economic calendar is extremely light. The only pieces of data due for release are consumer prices from Germany, the final release of Q3 GDP from France and money supply from the Eurozone. Switzerland on the other hand will release its UBS Consumption Indicator and KoF Leading Indicator report. After Wednesday’s sharp rally, the Swiss Franc has given back a small portion of its gains against the euro. Considering that EUR/CHF is still trading near its 9 month lows, we remain on the lookout for intervention by the Swiss National Bank.

GBP: UNABLE TO RALLY

Unlike some of the other major currency pairs that have managed to recover against the U.S. dollar, the British pound remains very weak. In fact, we haven’t seen a meaningful rally in the GBP/USD since last Wednesday. The pound is also very weak against the euro and Swiss Franc and has failed to rally against either of these currencies since last Thursday.  It is also important to recognize that the murky outlook for the economy and dovishness of the Bank of England are the primary reasons why the currency has seen such severe under performance in the recent week. There was no economic data from the U.K. or comments from Bank of England officials this morning and unfortunately, the pound may continue to have difficulty rallying next week with nothing more than house price reports due for release.  Although the GBP/USD has found support above 1.59, we believe that the currency pair will only hold above this level temporarily. The break of 1.60 which is both a psychological support level and the 200-day SMA makes a test of 1.58 likely. 

AUD: COULD BE POISED FOR MORE LOSSES

It has been an extremely quiet day for the commodity currencies which ended the shortened trading session virtually unchanged against the U.S. dollar. Of the 3 comm dollars, the Australian dollar was the best performing. Although there was no economic data released from Canada, Australia or New Zealand, the mild gains in commodity prices have helped to drive these currencies higher. The price action in oil and gold should continue to be one of the primary drivers of volatility for the currencies in the coming week since there are no market moving economic reports due for release. The only numbers that we have on the calendar are money supply for New Zealand and private sector credit for Australia. The lack of fundamental catalysts will also make technical levels more important. For USD/CAD, 1.0405 is support and we believe that this level will holding in the coming week. However the AUD/USD and NZD/USD both appear to be very weak and could be poised for further losses after having broken their 100-day SMAs which are hovering at 0.8870 and 0.7150 respectively.

JPY: BOJ OFFICIALS STILL WORRIED ABOUT RISKS

The Japanese Yen strengthened against every major currency except for the Australian dollar despite cautious comments from the central bank. According the minutes from the Bank of Japan’s monetary policy meeting last month, the central bank feels absolutely no urgency to unwind emergency measures. Members of the committee believe that price pressures will moderate significantly towards yearend which is a dovish statement.  However it is important to remember that these minutes reflect the BoJ’s sentiment before they held their emergency meeting on December 1st. The comments from central bank governor Shirakawa last night suggest that the central bank is still worried about downside risks. Shirakawa warned that the BoJ could “act swiftly and decisively if concerns arise that financial market stability may be compromised.” Given that he spoke specifically about periods of excessive Yen strength, we believe he is watching the currency market closely. Over the next 24 hours, Japan will be the only country to release economic data. The barrage of economic reports that include consumer prices, household spending, the jobless rate and housing starts will provide a more updated look at the Japanese economy.

GBP/JPY: Currency in Play for Next 24 Hours

GBP/JPY will be the currency pair in play on Monday. Japanese industrial production and retail trade are due for release at 6:50pm NY Time 23:50 GMT while the U.K. Hometrack Survey is scheduled for release at 7:01pm NY Time or 00:01 GMT. 

GBP/JPY is currently hovering in the range trading zone which we determine using Bollinger Bands. Over the past few weeks, the trading range of GBP/JPY has become increasingly smaller signaling that a breakout may be imminent. The possibility of an expansion in volatility is supported by the triangle formation. A break of 147.50 would put the currency pair into the Buy Zone and indicate that a breakout has occurred to the upside while a break of support at 145.50 would signal further losses in the currency pair.

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.