Today, with silver rebounding immediately after its spike down, the commodity currencies also started to gain. The Australian Dollar climbed to 0.9830 while the Kiwi rallied to 0.8190. Calling this advance a “rally” is probably premature, as more meaningful advance is needed to turn the bearish tide. If anything, we have just witnessed a corrective rebound within the main downtrend. Still, these moves were reasonably large and directional, steady enough to make few pips on.

As discussed yesterday, I was looking for a rebound in these instruments, although admittedly to somewhat smaller degree. My currency of choice was the NZD-USD, where I wanted to get short within the first few hours after the open. The entry happened to be at 0.8089, with exit at 0.8137. Less than possible, but almost 50 pips in this pair are not a bad haul in current environment. As mentioned before, I do not think this is a start of something bigger at least not yet.

Mike K.

In the past few days, many analysts started to issue warnings about this rally, but for other reasons. Yields on Japanese government bonds experienced a sharp uptick in the past couple of weeks, reaching as high as 0.865%. That is almost double the yield of 0.444% in early April. Some market observers are beginning to think that soon the yields may reach levels high enough to become attractive to income seekers. At some point, we could have a situation when the Japanese Yen is a target of the carry trade and not the funding currency. It would mark a dramatic change to what we have been used in the past decade or so, although this line of thinking is probably premature.

This 5-year chart of 10-year JGB shows that current yields still have some distance to go before they become truly attractive. Even in this global low-yield environment, we would have to see the JGB at about 2% or higher before there is a rush of new buyers. Besides, that would not necessarily translate into much higher short-term yields, the driver behind the carry trade. It is unlikely for the Yen to reverse direction (become stronger) on these basis, even if such scenario is intriguing and worth keeping in mind for possible future consideration. For the time being, a rebound in the Yen (certainly possible) would be for other reasons, mostly technical.

Commodity currencies have also been under severe pressure lately. While the Aussie received most of the spotlight, the Kiwi is just as weak. In fact, over past couple of sessions, it appeared to be the laggard of this group, suffering the biggest loss. Closing at 0.8061 on Friday, the NZD-USD is approaching the 0.80 handle, a technical and psychological objective for this market swing. This suggests a strong possibility of rebound or at least consolidation within the downtrend.

I will look for a short-term rebound in this pair once the markets open, similar to the trade in the EUR-JPY last week, only in opposite direction. Initially, I would like to see a downside continuation, followed by a bullish reversal candlestick pattern on the hourly chart during first few hours of trading. The objective here would be in the range of 30-40 pips, modest amount, but in line with general volatility of this pair. In addition, the AUD-USD and several other pairs present similar technical picture and are candidates for trades based on these principles.

Another currency pair of immediate interest is the popular beast. Its hourly chart has formed a base, bullish pattern within the uptrend, with the key resistance at 156.75. If the price moves above this obstacle, we can expect an upward continuation of at least 100-120 pips. However, I will avoid the trade if the GBP-JPY moves higher immediate after the open, as these early moves have a higher probability of failure. In addition, I am on a lookout for opening gaps, which often present decent trading opportunities. Have a great trading week!

Mike K.

Commodity currencies, on the other hand, moved to a different tune. All of them slipped again, especially the Australian Dollar and the New Zealand Dollar. They lost about 1% each, maintaining their downward trajectory. There was no specific news specifically affecting these instruments, which means that longer-term sentiment has definitely turned bearish. Even the potential short-term rebound discussed here yesterday did not happen.

On the hourly chart, the AUD-USD had started to form a possible bullish reversal pattern. A move above 0.9920 would have completed it, suggesting a rebound of some magnitude. While the price came close to this threshold, it failed to penetrate it and fell another 100 pips on the day. That particular set up is no longer valid and my buy order is cancelled. Of course, the price could bounce now, after finding support at the 0.98 handle, but I do not see suitable buying pattern. Have to wait for more price development.

On Friday, we have scheduled announcements, which are very likely to affect the Canadian Dollar. Inflation numbers, in form of the CPI, should create volatility. While not as potent as employment and central bank releases, this data receives plenty of attention from market participants and tomorrow should be no exception. I will focus on short-term trades at the start of the London session, primarily in the Dollar pairs.

Mike K.

How is it good for traders? Very simple – lower spreads. In order to remain competitive and retain their market share, the main liquidity providers have been steadily lowering spreads. Just a few years ago, a typical spread on the EUR-USD, the most liquid currency pair, was between 4 and 5 pips. These days 2 pips seem to be the norm, although top brokers routinely offer spread in the range of 1.2-1.5 pips. This means that the primary liquidity providers operate on 0.5-1.0 pip spread. In other currency pairs, this improvement is even more pronounced. While lower spreads by themselves will not make a trader profitably (and if so, only by narrow margin) they represent lower costs of doing business, always a welcome sight. If this trend continues, as it appears to be, spreads should continue to shrink. Perhaps someday soon a retail trader will be able to trade the GBP-JPY under 2 pips.

The US Dollar has been very strong recently, posting solid gains versus all the majors. The Australian Dollar in particular has been losing ground rapidly. While that is in line with the longer-term trend, the Aussie could be oversold for now and perhaps ready for a bounce. The hourly chart of the AUD-USD is showing a potential bullish reversal pattern. Of course, the formation is not fully developed, but then again, once it is, it might be too late to take advantage of the situation. If the price moves to 0.9920, I would like to go long, targeting 50 pips. Situation is similar in most of the majors.

At the same time, some of the Yen pairs are showing signs of weakness. Perhaps the most prominent, thus most likely to correct, is the EUR-JPY. At this point, charts are not suggesting a major reversal, only a pullback. However, on the hourly chart that would present a profit potential of about 100 pips, if the correction indeed takes place. A bearish breakout below the latest low is the signal to enter the short. This pair can move fast and crashing important support might speed up the selloff. If the trade happens, it should not last long.

Mike K.

For this particular transaction, I wanted to see a bearish reversal candlestick pattern on the hourly chart. A positive development for this set up was the new price high for the trend. The EUR-JPY ran up to 132.38 but immediately retreated, forming a shooting star in a process, which I saw as a low risk entry for a short. The actual trade happened at 132.18, seeking 40 pips.

While the EUR-JPY was among the most active pairs on Monday, its total daily range was very small, at least when compared to recent volatility. Still, that was enough to reach my objective, making it a decent trade for prevailing market conditions.

Looking at a larger-scale chart, the intermediate term graph of the NZD-JPY appears interesting. Following massive volatility in April, the price has settled into consolidation, which by now assumed the shape of an ascending triangle. Slowly but surely, the NZD-JPY is nearing the breakout stage. The pattern suggests an upside move, although I am neutral at this point. Once the move starts, the market itself will dictate direction to trade. In all likelihood, we will not have to wait too much longer for the breakout.

Mike K.

Even though the USD-JPY rose sharply to almost 102 on Friday, Japan avoided an official rebuke at the meeting. In fact, there was an agreement, which all member states are living up to their prior commitments. Interesting, since every major central bank is actively lowering interest rates, engaging in strong asset purchasing programs or even outright intervention (RBNZ comes to mind). In other words, everything is great and nobody is engaging in anticompetitive practices. It is officially back to business of quantitative easing, or money printing.

All of the JPY crosses experienced considerable rallies and some of them are perhaps ready for a short-term correction. Not reversals, but pullbacks, especially when using hourly charts. In case of the EUR-JPY, the price closed for the week just off the high level, shy of the 132 mark. I will be looking for a bearish candlestick pattern on this chart, signaling a short entry with 40-50 pips objective. Ideally, the EUR-JPY should make a new high soon after the open, but that is not critical only helpful.

For a change of pace, here is the AUD-NZD, or more to the point, its 4H chart. This pair has been in a well-defined downtrend, falling to as low as 1.1954. Recently, though, it started to show signs of reversal, or at least a consolidation. So far, it is not clear, but if the AUD-NZD is indeed going to reverse, I want to be ready with buy order at 1.2175. Objective for this trade, if develops, will be 150 pips. Of course, on this scale, the situation can easily take 2-3 weeks to conclude, so patience is necessary. Meanwhile in early trading, I will look for opportunities in form of opening gaps. Have a great trading week!

Mike K.

Markets expected to see the Employment Change of 12 K, but the actual number was 50.1K. It is especially impressive when compared to last month’s decline 31.2 K. At the same time, the Unemployment Rate dropped to 5.5% from 5.6%. The AUD responded with a rally of 90 pips in about a minute. However, this did not last and by the end of the day, there was a stunning reversal of fortune. The AUD-USD not only gave back all of its earlier gains, but continued significantly lower, falling to 1.0045.

This development put the price outside of the long-standing consolidation zone. From the technical perspective, the AUD-USD is officially bearish now and is likely to continue lower over time. That does not prevent a potential bounce, but the trend is undeniably down now. We could see some psychological support at the parity, although the objective is likely the 0.95 handle.

We are still not done with employment data for the week. On Friday, Canadian numbers will round up coverage of the commodity currencies. Analysts estimate the Unemployment Rate to stay at 7.2%, while the Net Change in Employment should show a gain of 15 K after a decline of 54.5 K last months. Surprise reading could easily create a spike in volatility, much as we saw in the AUD and the NZD yesterday. I will focus on short-term trades, looking for breakouts from tight ranges leading to London opening.

Mike K.

While the currency experienced some recovery in early Tuesday trading, on better than expected Chinese data, it faces a much tougher test on Thursday. The Unemployment Rate and the Employment Change are typically huge movers for the AUD and it should not be different this time. Analysts expect the Unemployment Rate to stay at 5.6%, while the Employment Change is set to show an improvement of 12 K, after the abysmal reading of negative 36 K a month ago. It is important to note that Chinese inflation numbers (CPI and PPI) will be released at the same and could create additional confusion and volatility.

As discussed earlier in the week, negative response today could start a major new trend in the AUD-USD. On the daily chart, the price has returned to the key support are of 1.0150. Should the price move lower after the announcement, especially if it happens with some authority, the next stop for this pair could be at 0.9500. Of course, this is speculative at this point, but the event is very important. On the other hand, if the AUD-USD finds support here, perhaps on positive news, the price could linger in the current consolidation area for much longer. With any luck, we will get some answers within next few hours.

We should not forget about the New Zealand Dollar, which is showing its own signs of weakness. Recently, the RBNZ admitted to intervening in the market, trying to limit the upside here. Even a cursory look at the chart suggests that the area of 0.86 in the NZD-USD struck a nerve with the central bank. Now the Kiwi is testing significant support at 0.8460. A decisive downside break below this level could signal a selloff down to the 0.80 handle.

Trade from early this week, the buy in the USD-CAD. The premise here was to go long after a bullish candlestick pattern, using the hourly chart. It happened soon after opening, with entry at 1.0075. While the price moved my way for the most of the way, it was doing it at a snail’s pace, making very little progress. In the end, I closed it for a gain of 12 pips late in the day. Result is not particularly impressive, but it was an “easy” trade, relatively predictable. Moreover, most other currency pairs were also lifeless on Monday, so from this perspective it was a decent trade, if minor in scope.

Mike K.

Most analysts predict the rates to remain unchanged, but there is no consensus. Growing number of market observers see the RBA as cutting its benchmark, which almost certainly would send the AUD lower. After weak or even outright bad numbers last months, another soft employment report would also be bearish for the Aussie. If the Australian Dollar responds in the same direction after both announcements, we could see the start of an important, longer-term price swing.

This confluence of potentially strong catalysts is happening at a time when the technical picture also supports formation of a new trend. On the daily chart, we can see how the AUD-USD has spent several months in a relatively narrow range of about 500 pips. “Relatively”, because prior to this consolidation, the Aussie had been much more volatile. In addition, duration of this lifeless period suggests a more directional behavior sooner rather than later.

The weekly chart also reveals some interesting details supporting a new trend sometime soon. Here we can also see the tight consolidation, perhaps even better defined than on the daily chart. Price action is even tighter than in 2008, right before the huge selloff of the decade, as indicated by the ATR. Now, it does not mean that we will experience another monumental collapse, but is suggestive of conditions ripe for more directional activity ahead. Whatever happens, both the RBA meeting and the employment data should create plenty of volatility in the Australian Dollar.

Mike K.

While these moves were one-sided and directional, that was not true for the European currencies. The Euro, the Pound and the Franc became volatile even before the announcement, causing consternation among traders. Everybody is trying to explain why it happened, calling it “banging the beehive”. Most market makers withdraw liquidity before major events, like the NFP, and “banging the beehive” attempts to trigger enough standing orders during this thin period to push the price decisively in one direction. If the following data release also lines up with the “forced” direction, the response could be an even great market swing. Unfortunately for those trying it on Friday, that was not the case.

It seems that early market participants expected the employment numbers to be positive for the EUR-USD. They were wrong, as the reaction to the news crashed the price, certainly stopping out the longs. To add insult to injury, the Euro recovered soon after, rallying 120 pips. This development underscores the dangers of trying to predict the outcome of a major fundamental announcement and putting money on the line.

Sharp price swings of this nature distort short-term charts, making it difficult to look for trading clues. That is especially acute going into the weekend, when the sentiment can change at the open. For all practical purposes, the affected currency pairs closed neutral on Friday and need to show more price development before “educated” trading decisions can be made. With this in mind, I will look for trading opportunities elsewhere.

The USD-CAD closed near the low for the day, which suggests a short-term continuation after the open. At the same time, I would expect a bullish reversal after initial downside movement. If the hourly chart develops a convincing bullish reversal candlestick patter between 1.0070 and 1.0040, it should create a good buying opportunity. The objective here is modest, in the range of 30-40 pips, but probabilities for a successful trade are good.

The EUR-GBP has pulled back from the high of 0.8814 earlier in the year shedding over 400 pips. So far, it is only a pullback within the main uptrend on the daily chart, but it could change into a reversal soon. Currently the price is in a narrow range between 0.8397 and 0.8497. A move through either one of these levels could easily indicate direction of the next main swing in this pair. There might quick 100 pips or so on a breakout either way. Have a great trading week!

Mike K.