Major Currencies Challenge Recent Trends - Where to From Here?

Analyst picks for: 2009/02/23
Written by the DailyFX Research Team

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 topas 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.

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Chief Strategist
[B]Antonio Sousa[/B]
[B]My picks:[/B] Sell High-Yielding Commodity Currencies
[B]Expertise:[/B] Global Macro
[B]Average Time Frame of Trades:[/B] 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
[B]Jamie Saettele[/B]
[B]My picks:[/B] long EURUSD, against 1.25, targets 1.33 and 1.37
[B]Expertise:[/B] Technical
[B]Average Time Frame of Trades:[/B]

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
[B]John Kicklighter[/B]
[B]My picks:[/B] Short EURGBP
[B]Expertise:[/B] Combining Money Management with Fundamental and Technical Analysis
[B]Average Time Frame of Trades:[/B] 3 days - 1 week

Uncertainty is the catalyst for market movement. When the market is unsure about the key driver behind an economy and its currency (risk appetite, interest rates, key fundamentals) or its general health, speculation takes over with a clear impact on volatility. Recently, however, we have seen some the level of clarity fluctuate for some of the market’s most active currencies. For the euro, rumors of bank defaults and debt downgrades, finally pushed the currency below 1.2725 against its US counterpart - triggering the pending short entry orders I had in preperation for such an event. However, this move was stiffled soon after it was entered, leaving me with a very modest return on the first lot (equal to risk) while the remaining half was trailed out just above breakeven. Looking at market conditions today, the scales of certainty seem to once again be tipping. European authorities are calling for extensive financial reform, the UK is trying to force its essentially-nationalized banks to lend and the US seems to be contemplating a government take over of a few key free-market players. Any one or all of these could certainly drive volatility; but direction is still dependent on their individual or aggregate outcomes. To buffer my fundamental speculation, I will use technicals to develop a position.

Looking back over years of EURGBP price action, it should become clear that the dominant trend is bullish. However, looking back the first half of this decade, we can see that congestion has historically been much lower - and in a comparatively tight range for much of that time. While, I cannot deny the bias; I do doubt the fundamental support for the exchange rate to continue its rise or even sustain its current highs. While the UK is anticipated to suffer the worst contration among the major, industrialized economies through 2009; the Euro Zone is not in a much better position (especially with financial strains starting to show through). Fundamentally, fair value is likely much further down than current levels; but that does not mean the entire market will come to that conclusion together. Therefore, I will take a reduced sized short with the range that has developed with a resistance around 0.8920. I will build this into a full-sized position when spot marks a medium time frame close (60, or 240-minute bar) below the confluence of the 50 percent Fib of the October to January bull leg and rising trendline from October 20th low around 0.8750. Slipping below the 100-day SMA at 0.8710 would give further fuel to my technical fire. A first target would be set well above the 0.85 psychological level as there is a 61.8 percent Fib of the aforementioned wave settled at that point.

Currency Strategist
[B]Terri Belkas[/B]
[B]My picks:[/B] Long EUR/JPY
[B]Expertise:[/B] Fundamentals Combined With Technicals
[B]Average Time Frame of Trades:[/B] 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
[B]Ilya Spivak[/B]
[B]My picks:[/B] Remain Short EURUSD
[B]Expertise:[/B] Global Macro, Classic Technical Analysis
[B]Average Time Frame of Trades:[/B] 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.

For complete analysis of the major currency pairs, please see my latest technical outlook report.

Currency Analyst
[B]John Rivera[/B]
[B]My picks:[/B]Short EUR/USD
[B]Expertise:[/B] Fundamentals Combined With Technicals
[B]Average Time Frame of Trades:[/B] 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
[B]Joel S. Kruger[/B]
[B]My picks: [/B]Short USD/JPY @94.70 for 92.55 Objective, Stop @95.70
[B]Expertise:[/B] Technical Analysis
[B]Average Time Frame of Trades: [/B]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.

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