This text is from blog famous currency strategist Joel Kruger .
PATIENCE REQUIRED – A new week is underway, and as has been the case, I continue to look for broad based USD strength. While it is entirely possible that currencies could still extend gains a bit against the buck, any additional rallies are seen very well capped in favor of bullish USD resumption. I am even looking for eventual sustained upside in USD/JPY, with the market projected to establish back above 79.00 and then accelerate for a retest of the yearly highs at 84.20. That being said, I am not recommending any fresh USD positions at current levels, and instead advise remaining patient until the short-term picture becomes a little less choppy. The key level to watch out there remains EUR/USD 1.2800. A break and daily close back below this level would most probably get the buck moving higher across the board.
Daily forex technical outlook video by Joel :
OPPORTUNITY AWAY FROM THE USD – As far as the non-USD markets are concerned, I do believe there is a great opportunity at present to look to establish a meaningful long position in EUR/CHF. In the previous week, I recommended looking to buy dips below 1.2100, and with the market currently below the figure, this trade has become a reality. While we might not explode to the upside over the next couple of days, any setbacks should be very well supported ahead of the well publicized SNB 1.2000 defense level. Longer-term technical studies are further supportive, with the latest push towards 1.2200 likely setting up the next major upside extension towards the 1.2500 area over the coming weeks and months. Stops should be appropriately placed below 1.2000, and only exit on a weekly close below this major barrier.
THE NEW INTERVENTION – Moving on, I have also been thinking quite a bit about the broader macro implications of the recent breakout in the EUR/CHF cross. Remember, this is a market that had been brutally beaten down in recent years to record lows, before the Swiss central bank finally stepped in and said enough was enough. With the Franc rallying so hard on the back of safe-haven, crisis related flows, local officials were left with no other option but to come up with a very extreme strategy to intervene on behalf of the currency. This led to the announcement of the 1.2000 defense, which in turn opened a surge above the barrier, with the market then holding above (with minor intraday exceptions) ever since. But the interesting thing to me, is that we saw this cross trade in a 20 point range over 1.2000 for a year, before finally seeing the bullish breakout.
SLOW AND STEADY WINS THE RACE – Many were taken aback with the recent surge in the cross, as previous intervention attempts in FX markets were historically unsuccessful. So how could this intervention actually succeed? Well, I think it was and is a combination of two key factors. The first factor is the way in which the intervention was executed. While the SNB was highly aggressive with their defense of the 1.2000 barrier, they also did not appear to be rushed or unnerved by the fact that their intervention efforts were not at the same time opening an intense break higher in EUR/CHF. Instead, the central bank remained patient and seemingly outlasted all of those shorts looking to challenge the intervention and take the cross back under 1.2000. Once these shorts had mostly given up, the opportunity then presented to take the market higher.
STRONG BACKING – The second factor is perhaps even more significant and one which has presented in many different ways throughout this latest global macro crisis. In previous downturns, countries faced with slowdowns, were more or less left on their own to deal with the local economic deterioration. But in today’s world economy, this has not been the case, and we have consistently seen a coordinated response to economic setback, with other countries stepping in to help prop local economies and avoid contagion. I believe this has been a key factor resulting in the success of this latest SNB intervention, with the strong SNB defense language backed up by other governments and central banks, to ensure a successful currency intervention.
LOOKING BEYOND THE FRANC – It is is pretty amazing when you think about it. Not only did the SNB say they would be intervening, but they also cited a specific level (1.2000) they would defend against. In my experience, up until this point, citing a specific intervention level only incited markets to further challenge the central bank’s convictions, leading to a guaranteed break of the intervention level. So the fact that the SNB was able to cite the 1.2000 level and successfully defend, probably serves as further proof that there were other powers backing the Swiss. With this in mind, I started to think more and more about the success of the SNB intervention and the broader implications. For example, if the Swiss were able to successfully prevent additional appreciation in their currency, why could others not do the same? Specifically, if the SNB could diminish the lure of safe-haven flows into the Franc, why then couldn’t the Japanese do the same and stop the Yen from appreciating further?
AN IDEAL CANDIDATE – If you think about it, Japan would be the perfect candidate to benefit from this new world intervention, where a local government has the backing of other governments to ensure the success of the intervention. Japan’s economy is in many is much more troubled than the Swiss economy, and short of its ultra low yield, the Yen is anything but a safe-haven currency. The Japanese economy is arguably much more vulnerable to Yen strength than the Swiss economy is to Franc strength, and throw in Japan’s already well known reputation for intervening in the Yen, and it doesn’t seem too far fetched to assume that we could indeed see the Yen start to depreciate over the coming weeks and months.
HAS THE YEN INTERVENTION ALREADY BEGUN? – The Yen sits just off record highs against the buck (USD/JPY near record lows), and government officials have been quite vocal about not wanting to see the currency appreciate further on external flows. So bottom line…if Swiss intervention efforts were successful, could we also be in the process of seeing a new type of slow and steady intervention in the Yen, where USD/JPY consolidates for a painfully prolonged amount of time without going anywhere to tire out Yen bulls, before ultimately breaking higher? Is it not possible that there are other forces at play here, where this time, Japanese government intervention efforts might also be backed by other powers? This whole idea could be a stretch, but it also just might be exactly what is going on. Only time will tell. Technically, pay attention to USD/JPY 79.00 this week. The level represents the top of the daily Ichimoku cloud and a break and close above would be the first time above the cloud since April. This could be a very constructive technical development which contributes to the bullish outlook.