The FX Buzz
Last week ended with a rather negative tone as debt problems in Dubai caused worries over the economic recovery to refloat once more but most importantly it spurred rumors there is more Dubai like bubbles awaiting to be burst. It seemed that the positive sentiment which fed markets only a few days before faded rather quickly moving investors to re-price risk in their positions. But not all investors were on the red, the FX market was in the eye of the storm and on the centre of the Buzz, investors who reacted quickly to the rumors echoing from Dubai were those who closed their positions in the money. Traders who bought the Dollar above 1.51 per Euro and the Yen above 150¥ per Sterling last week, were able to Sell both substantially higher having juicy profits even before the week ended. Meanwhile the Strom in Dubai has eased somewhat after UAE central bank pledged to assist distressed banks in the region. However the past week made one thing clear, when market Buzz is dominant market volatility is prominent, and with volatility comes opportunities. We therefore have decided to prepare for you a few update on the latest FX Buzz and some suggestion on how you should react to them.
The Buzz: Will the SNB (Swiss national bank) intervene with the CHF rate?
Lately investors are betting more and more on an intervention by the SNB to contain the strength of the Franc. Why then if Swiss export held well does the SNB need to intervene? The reason is carry trades , Eastern Europe Real Estate ventures barrowed heavily from Banks in Switzerland in Swiss Francs and whenever the Franc gains strength those borrowers have a hard time paying the debt placing strong pressure on the Swiss banking system.
So what should you look for?
The Swiss GDP is due today with investors expecting a 0.3% Growth QoQ any surprise downwards will signal the Swiss economy is having a hard time dealing with a Strong Franc, spice it a little with a CHF close to 1$ trading around 1.5CHF per Euro and you get a perfect recipe for rumors on an SNB intervention to start floating. In this case the classical rule goes Buy USD/CHF, EUR/CHF on rumor sell on fact.
The Buzz: Will the BOJ (Bank of Japan) come to the rescue?
Many ask themselves what is the factor that eventually led the Japanese Yen to break the 87 support against the Dollar? The answer is deflation, Japanese CPI figures published just before the dawn of the 27 of November pointed inflation in Japan is -2.5% YoY. This caused investors to move quickly into Japanese Government bonds for safe haven, folding counter Yen bets and pushing the Yen to a 14 Year high against the Dollar. The record high Yen against the Dollar which is the main export zone for Japan is burdening on Japanese exporters generating an increasing tension between the government which wants more of an active intervention and the Central bank which is reluctant to do so.
So what should you look for?
The BOJ can either interfere directly in the FX rate, the USD/JPY encounters strong demand under 85¥. The BOJ can also purchase corporate Bonds to ease credit conditions (effectively print money). Look for any hints on BOJ statements of assets purchases. A large scale of asset purchasing by the BOJ can push the Yen lower very rapidly.
Bullish Scenario-A daily close above 1.0250 would move the pair to retest the 1.035 resistance.
Bearish Scenario- Since the pair is still in a bearish trend line the downside risk is still higher. Another failure to break the 1.02 resistance will pull back to retest the 0.99 very quickly.
Bullish Scenario- The pair is currently just 85 pips short of the 1.5 key level making it a good risk reward trade with a potential target at 1.5250.
Bearish Scenario- A Daily close below 1.4900 could push the pair to retest the 1.45 support.
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Disclaimer: Trading in the Foreign Exchange market might carry potential rewards, but also potential risks. You must be aware of the risks and are willing to accept them in order to trade in the foreign exchange market. Don’t trade with money you can’t afford to lose.