Friday, 10 May 2013

Range Bound Trade Confusing to Traders of the Yen and the Euro

Ralph Shell, Excel Analyst

Excel Markets ECN Forex Broker Since the EURUSD (FXE, UUP) made a spike low of about 1.2850 in early April, the euro has forged a steady recovery.  It has not been dramatic, but the bears have paid a price.  The short side of this pair has been popular with specs.  In the futures market, the COT report showed the specs to be short 82,289 contracts on April 2nd.  At that time, the spec short was large, though not as big as short positions in the yen and the pound.

During the period from early April until the May 1st - a high of 1.3240, almost 400 pips from the swing low - the spec short has naturally reduced his position.  The surprising thing, however, is that he remains short 39,377 contracts.  But perhaps these are merely new shorts replacing the ones who had enough pain. 

New euro shorts are not hard to recruit.  After all, the euro is like one large dysfunctional family.  Individual needs of the various members are not equally served.  A single-valued currency for the euro conglomerate does not work: EU unemployment is a record high, and the unemployment rate in the 15 to 24 year age group is creating a jobless generation.  Surprising then, there has yet been a messy divorce from this diverse group.

The EU proponents rightly contend squabbles over money is a big improvement over guns and tanks fighting over boundaries.  The problem here is that the Brussels cabal is usurping power from the individual states, and ignoring the obvious fact that one currency does not well serve all countries.  Perhaps it has always been this way, but it seems to me there is increasing hostility to Frau Merkel and her austerity platform.  Combine the political agitation with the debt and employment, there is no shortage of potential EU problems.

Trade in the EURUSD is converging into a triangle, formed with two trend lines.  Eventually, all trend lines are broken, but a converging pattern makes the break-out imminent.  Recently, there has been support approaching the 1.30 handle.  Should the market break the top trend line, the next stop would be the 1.3140 high.

Click to Enlarge EURUSD Daily Forex Chart

Thursday, the sell-off seemed to be a response to the US first time unemployment which registered the lowest since January 2008.  So far the reduction in Federal spending has not resulted in a slower US economy.

The USDJPY is another interesting range bound pair.  Since we cleared the 96.50 level and failed at the attempt to conquer the 100 handle, we have been trapped in this range.  Overnight, we get important reports from Japan, the Adjusted Current Account Total. and the Trade Balance BOP Basis.

Click to Enlarge USDJPY Daily Forex Chart

The market is expecting a positive number for the Current Account total.  There have been reports the Japanese with the weaker yen, have repatriated large sums of monies invested over seas.  The appreciation of other currencies versus the yen have yielded big gains, so the money has come home, perhaps reallocated to the streaking  Nikkei market.  It us anticipated this number will be 480.0B ¥, compared to -0.1B ¥ the previous month.

The Trade Balance is anticipated to be -274B ¥ compared to -677B ¥ in the previous period.  The Japanese Trade Balance has turned negative this year, but it is expected the weaker yen will give the country a boost.  Eventually it will, but it takes months to turn trade balances around.  Besides, a weaker yen makes Japan's energy imports more costly.

A big dose of bear Japanese economy news might be enough to send the yen through the resistance at 100.  Some of the chart boys claim the next resistance is 102.50, but the trouble I have with this move is traders are already loaded up short.  The last COT report showed the specs were short 110,542 futures contracts.  This has been a long and festive party for the bears.  Perhaps they will win again, but they may be vulnerable should there be a surprise.  Remember, always mind your money.
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