Better Trader

Pre-RBA Aussie Insights

By Ashraf Laidi

Today’s RBA decision is widely expected to keep rates unchanged at 3.00%. Markets were not convinced with the RBA’s December rate cut as the Aussie rallied following that decision. The RBA explained in December: “While the full effects of earlier measures are yet to be observed, the Board judged at today’s meeting that a further easing in the stance of monetary policy was appropriate now.”

Indeed, the full effect of the aggressive 2012 rate cuts has yet to filter through. We have repeatedly stated the RBA’s 2012 easing (125-bps cuts slashed the rate to 2009 lows of 3.0%) was a crucial factor in weighing on the currency as the central bank expressed preoccupation about excessive currency strength following the ECB/Fed easing decision of Q3-Q4 as well as the IMF’s November decision to include the Aussie in its reserve currency data. Today, AUD/USD stands slightly below the level where it was at the December 4th decision. The RBA is unlikely to carry on easing in order to weaken the AUD/JPY rate, when the bulk of the move is a result of Tokyo’s policy making.

AUD/USD is seen getting a brief knee-jerk bounce following a decision to hold rates unchanged, but upside is likely to run into resistance stemming from political nervousness in Europe — acting as an excuse to rein in recent overheating in risk appetite. These dynamics are likely to translate to mounting resistance near 1.0480s, but the support remains the more immediate source of concern, as 1.0350 support beckons. A break below 1.0350 will likely target the 200-DMA of 1.0310, but a reminder that the RBA is done at 3.0%, will likely lend key support above 1.03.

AUD/JPY is the preferred Aussie pair with structural positive bias, mainly due to entrenched JPY bearishness resulting from Tokyo’s one-sided campaign to target higher inflation and lower JPY. Any downside caused by depending sell-off in global equities is seen calling up the 95.20 and 94.70 as preliminary levels of support for paving the way for the bulls.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Forex Trading: Why You Need to Look Past "Fiscal Cliffs"

By Elliott Wave International

The "fiscal cliff" agreement did not set the course for EUR/USD -- here is why.

First, a word on how we all are conditioned to think that, "momentum will remain constant unless acted on by an outside force." Read this excerpt from Robert Prechter's May 2004 Elliott Wave Theorist... Read more.

Nikkei Looks up After Abe

By Ashraf Laidi

Japan’s PM to-be Shinzo Abe and his LDP party won 294 seats in the 480-member lower house of parliament, as outgoing PM Noda’s Democratic Party of Japan lost ¾ of its lawmakers. LDP’s Abe has been synonymous with yen weakness due to the aggressive easing monetary policy he has advocated until inflation rises to +2-3%. Abe’s pro-growth slant is manifested through his calls for increased military spending and higher public works spending–focusing on earthquake and tsunami defense, as well as strengthening the coastguard, Japan’s first line of defense against Chinese efforts to challenge Tokyo’s control of the disputed Senkaku islands.

The Bank of Japan meets on Wednesday night/Thursday morning, but no new easing program is expected until the January 21st meeting. Yet Abe is pressuring the BoJ to act this week. Either way, he will push for a ministerial joint-statement to double the BoJ’s inflation target to 2%.

Most remarkably, Japan’s inflation rate hovered around the -0.1% to -0.3% territory during most of the last 10 years. A +2% inflation print was seen in four occasions in in 2008 (June – September 2008) and six occasions in 1997, both periods prevailed during high global growth and rising inflation. Thus, if Japan’s best growth rates hardly saw a durable 2% inflation reading recently, then to what extent will the BoJ be forced to ease?

The yen impact of such massive easing has already been discussed here.

Nikkei Technicals: Up 16% in 2012, the Nikkei-225 posts its first annual increase after two consecutive declines, making it the second annual rise in the last six years. The breakout above the two-year trendline resistance coincides with the break of the 200-week MA, occurring two weeks ago. Notably, USD/JPY—an FX pair that’s highly correlated with the Nikkei—is points away from breaking its own 200-WMA for the first time in five years.

Trendlines and moving averages are important for the Nikkei, but oscillators may give us the real clue over future movements. The monthly chart shows stochastics to remain relatively modest compared to previous peaks despite the price being testing the top of its two-year channel. This may suggest further upside momentum, breaking towards an initial target of 10,250. A weekly close above it would paves the way for 11,313 –38% retracement of the decline from the July 2007 high to the March 2009 low.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Yen Shorts, Yield Lows & five-year Cycles

By Ashraf Laidi

Escalating yen shorts against the USD in the Chicago Mercantile Exchange which shows the highest negative positioning in the currency since the June 2007. Back then, USD/JPY was at a five-year high of 124.14, global equities hit new records, private equity deals were raging with extreme leverage and even busts in US mortgage providers were still under the media radar.

Also in June 2007, yields on 10-year Japanese government bonds jumped by more than 40 bps to exceed 1.80%. The yield rally was broad throughout the global sovereign complex, prompting Japanese investors to flee zero interest rates to chase returns abroad. Unsurprisingly, yields on the US 10-year note also a hit a five-year high at 5.32%.

Today, the yen is entering its third consecutive monthly decline amid expectations that LDP Shinzo Abe will force the Bank of Japan into extreme easing of monetary policy when he is likely to win the elections on Dec 16. Stepping up military and construction spending and pressing on the asset purchases accelerator are part of Abe’s goal of attaining a new 2-3% inflation target.

But the missing link remains in bonds. Unlike in 2007, when global yields were soaring in tandem on an overheating global economy and emerging inflation fears, today’s yields are mired by margin suppression, financial repression, interventionist central banks and continuous downgrades of global growth by the IMF and all major central banks. 10-year JGBs remain adrift at generation lows below 0.70%, while their US counterparts are 30 bps above their lows.

With the yen falling at such a pace despite languishing yields may lead us to imply that the current yen sell-off would quickly intensify by a mere blip in global yields.

Yen shorts against the US dollar have hit a five-year of 90,000 contracts. As high as this may seem, it pales to the 188,000 contracts of yen sorts in June 2007. And thus, it may well be that in order for JPY shorts to breach above the 100,000 contracts territory, markets may need some help from further run-up in equities. This could well transpire from a temporary deal on the Fiscal Cliff, a more durable resolution for Greece or the next equity assault on the bears following the latest round of asset purchases from the Fed. Equities may not be at the lofty levels of 2007, but are successfully shaking off the European woes and fears of a Fiscal Cliff. Germany’s Dax index is competing with its emerging Asian counterparts in the +25% YTD territory, the FTSE-100 attempts in breaking the 6,000 level, while US equities remain resilient atop their 200-DAY MAs. We await for the rest of the pieces to fall into place.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

GBP Breakout & Treasury Stmt Preview

By Ashraf Laidi

The breakout in GBP/USD has taken place as anticipated in last week’s piece.

What next?

Despite the renewed contraction in UK construction PMI (November’s 49.3 is lowest in three months), GBP/USD is unruffled as the Greece/Spain negative event risk is shaken off by the approved buy-back for Greek bonds and Spain’s bad bank bailout. Back to the UK, yesterday’s release of November manufacturing PMI edged up to 49.1 from 47.3, suggesting a slowdown in the pace of contraction.

Wednesday’s Autumn Treasury Statement (prelude to next year’s Budget Statement) will be watched for which additional cuts are made to fund the £5bn spending planned for education, transportation health and science. Over £1bn in additional cuts in wages, and building rentals is planned. GBP traders will welcome signs of an IMF-approved stimulus with as much as £5bn targeting growth (kick-starting construction, shovel- ready projects & road networks), while simultaneously cutting a cumulative £2.5bn to meet the rating agencies’ scrutiny.

No additional asset purchases expected from the BoE on Thursday.

GBP/USD always held above its June trendline support. The triangle, whose September 21 trendline resistance held for 12 weeks, has now broken to the upside. Closing Monday above its 55-DMA, makes for an additional positive signal in a long series of bullish developments.  Multi-time frame oscillators continue to improve (from daily to weekly & monthly). A daily close above 1.6125 will be required to extend the rise towards 1.6196 –76.4% Fibonacci retracement of the decline from the September high to the November low. $1.6225 is now within sight before mid month.

Today’s RBA decision to cut rates by 25 bps to 3.0% had STRONG AUSSIE written all over it. The decision to ease was mainly to avoid further currency strengthening rather than necessarily tackle an emerging macro slowdown. The Aussie rallied following the rate cut. The RBA has been increasingly uncomfortable with Aussie strength. And with Chinese figures improving by the week, the upward pressure would have been further magnified by RBA inaction, especially following the recent IMF decision to include Aussie in its FX reserves. A rate hold would have made task of the RBA harder in containing any unwanted appreciation.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

USD/JPY: Lemons into Lemonade

By Elliott Wave International

How Elliott wave analysis helps you as a forex trader with built-in, risk-defining safeguards.

On these pages, you've seen examples of how Elliott wave analysis can help you anticipate forex market moves. You've also heard us say that wave analysis is not a crystal ball. But here's what is remarkable: Even when your Elliott wave forecast doesn't pan out, you have built-in safeguards to alert you -- and help you manage risk. Here's a real-life example. Read more

Revisiting EURJPY Technicals & Fundamentals

By Ashraf Laidi

EUR/USD required a convincing catalyst to lift it back above its important 200-DMA of 1.2820. And it did.

China’s HSBC flash PMI hit a 13-month high at 50.4 reflecting improved credit growth and exports orders, allaying fears of a Chinese soft landing. Eurozone flash November services/manufacturing PMIs showed some signs of stability, thus enabling EUR pairs to move in tandem with rising equities.

Tomorrow’s release of Germany’s November IFO survey could magnify the recent bounce if the survey shows its first increase after seven consecutive monthly declines. We’ve seen post-Thanksgiving IFO releases to have a particularly significant impact in FX on a combination of thin trading activity and nearing the final big trades before trading desks wrap up for the year.

The fact that EUR/USD has broken well above its 200-DMA (previously a key resistance) and is now eyeing its 55-DMA may extend towards the next trendline resistance of 1.2960.

EUR/JPY
Updating our bullish call on EUR/JPY emerged in September calling for 107. EUR/JPY is now retesting its 100-DMA for the third time after two failures since the 2008 crash. Each of the prior two failures occurred in April of 2011 and April 2012– both periods involving a correction in global equities, and both stages were preceded by a rally largely involving ECB policy changes interventions. So what happens now? The Eurozone part of the equation remains unresolved—despite readiness by the ECB to pull the trigger upon a Spain request and a potential rally following the disbursement of funds to Greece. More importantly, the yen part of the equation rests on the implications for Bank of Japan policy change once the LDP takes the helm. The road to 110 yen appears more viable, as long as 104 support remains intact.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index

Which Works Best -- GPS or Road Map? (Part 3)

By Elliott Wave International

Trading with Elliott wave analysis.

This is part 3 of the series by the editor of our forex-focused Currency Specialty Service, Jim Martens. Read more.

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Yen Hurts Ahead of Another Regime Change

By Ashraf Laidi

Japanese PM Noda’s indications that he could dissolve the House of Representatives on Friday if the opposition agreed to plans to reduce the number of seats and to lower lawmakers’ salaries weighed on the yen across the board. The dissolution would lead to elections that are widely expected to end the Democratic Party’s three years in power.

The implications of seeing the Liberal Democratic Party (LDP) back in power mean that its leader Shinzo Abe would further exert his influence on the Bank of Japan to step up its activism in battling inflation by way of more extensive asset purchases. Such yen-negative prospects would be magnified by prolonged concerns with lack of medium term fiscal consolidation.

Political disarray and looming escalation in asset purchases are seen compounding recent yen losses following the latest figures showing Japan’s 0.9% GDP contraction in Q3 could well drag the country closer to its fifth recession in 15 years.

Aussie is seen as accumulating the greater potential for accumulated upside vs. the yen relative to USD/JPY, EUR/JPY or CAD/JPY. Despite the current sell-off in global equities and the positive correlation between AUD/JPY and world equity indices, the Aussie has outperformed most currencies over the past six months and four weeks on reduced prospects for further easing by the RBA and stabilising dynamics in China.

Considering the high profile leadership transition in China, and the prevailing easing policies (via low-profile open market operations rather than high profile cuts in interest rates), a gradual stabilisation in China would undo the Aussie risk premium associated with a China hard landing.

AUD/JPY broke above all key weekly moving averages (55, 100 and 200) over the past six weeks, eyeing the 85.00 territory. A successful breakout would lead the way for 87.00 as the momentum dynamics revealing similar forces to those in April-May of this year.

USD/JPY may be nearing eight-month highs, but the lingering uncertainty from fiscal cliff resolution and prospects for more aggressive policy steps from the Fed continue impose a lingering US dollar risk. Owing to these dynamics and the forces capping US bond yields, USD/JPY is seen contained at 81.70.

 

Ashraf Laidi is Chief Global Strategist at Leading Spread Betting Company - City Index