The humble short squeeze that started out quietly yesterday continued in earnest overnight as consolidation remains the name of the game and the self fulfilling prophecy of a Christmas rally remains firm on traders’ minds. I don’t believe in either a change of circumstance or this rally that everyone is looking for. It is of course understandable that crosses and indices would need to in some part revert from the one way landslide we saw last week and while there is still some further room for this move, I do think it should be rather short-lived.
The European Central Bank’s Long-Term Refinancing Operation today could prove to be the boom gate that puts a halt to this move, but either way you look at it, the market will be keenly watching and waiting for the results. It should give market participants an indication of just how insolvent some of these larger financial institutions are and how much liquidity they really need to survive the coming weeks, let alone the impending further downgrades that are coming Europe’s way.
The calendar outside of the above mentioned financing facility print also has UK MPC minutes, CAD retail sales, and US existing home sales ahead. The MPC minutes should show a unanimous vote while the other prints aren’t likely to be particularly market moving. Yesterdays US new home sales gave the market a boost in the arm which in large part was responsible for the “euphoria” we’re currently experiencing.
With regard to levels for the major crosses, here’s how I see them on the day;
EURUSD: This cross has a real chance of having another look at that 1.3250 pivot level, but having cleared nearest stops this morning will now need to get past the 1.3180 initial resistance (which may be a function of the LTRO). I prefer fading rallies and generally maintain my bullish USD bias. Stops will clearly need to go in above the 1.3300/30 levels.
AUDUSD: 1.0250 is the level you need to keep an eye and while this little battler has proven to be the highest beta cross of recent weeks, you can’t underestimate the amount of ammunition it has already spent overnight in climbing so high. Levels for stops for those wishing to fade would probably need to be above 1.0330 just to be safe initially.
GBPUSD: The Cable has truly outperformed overnight and still look strong. This isn’t so much of a USD story as it is simply a cable tale. The previous high was around the 1.5780 level and it looks like we’ll have another attempt up there this morning. I would think sellers and decent offers come in around the 1.5800/30 level and place their stops above 1.5880/5900.
USDCAD: I still like the CAD lower and thus would think there would traders out there looking to pick up the USDCAD on dips. Don’t be fooled though, this cross has got legs to go a lot lower and 1.0130/50 is where one might start to think about buying any, if at all.
Given the move in AUDUSD and subsequently AUDJPY the question of what to do with my long AUDJPY put has been well and truly answered for me and I will now be keeping it until expiry.
Good luck out there today folks.
Ken Veksler
SAXO BANK