Today is Wed, October 1, 2014 10:12:02 GMT
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Currencies CHF Commodity Bloc to Underperform While Major Currencies Consolidate

By Joel Kruger, Technical Strategist for DailyFX.com

  • Euro still locked in choppy consolidation
  • G-20, IMF and World Bank meetings kick off
  • Looking for underperformance in commodity and EM FX
  • German IFO and UK retail sales come in above consensus
  • Taking a closer look at risk management and effective trading technique

We have reached the final session for the week and after all is said and done, there have really been no significant price action developments in the major currencies. The Euro remains locked in a tight consolidation and will still need to break and close back above 1.3215 or below 1.2995 for clearer directional bias. Thursday’s successful Spanish bond auction has managed to prop the single currency for the time being, but any upside has been capped to this point.

Relative performance versus the USD Friday (as of 10:35GMT)

CHF +0.40%

EUR +0.35%

GBP +0.31%

CAD +0.30%

AUD +0.07%

NZD -0.01%

JPY -0.18%

Global equity markets still seem to be overvalued in our opinion and the technical picture warns of a more substantial decline over the near-term. As such, we would expect to see a continued underperformance in risk correlated currencies going forward, and perhaps it is best to be net short a basket of the commodity bloc and emerging market FX against the major currencies.

With this strategy, we would eliminate direct exposure to the US Dollar, whose fate seems to be less certain given the recent consolidation. By extension, we would also be long of some of the other major currencies like the Euro and Pound (against commodity and EM FX), and this seems to be the right trade on Friday, with both the Euro and Pound responding well to the much better than expected economic data in the form of German IFO and UK retail sales.

Looking ahead, markets may remain locked in a holding pattern in light of the G-20, IMF and World Bank meetings which are all underway. However, as per the usual, we do not expect any developments from these meeting to have any major influence on the direction in markets. The underlying market drivers over the coming weeks will continue to be driven off the Eurozone crisis, Fed monetary policy outlook, and Chinese economic performance.

Moving on, the other day I received an email from a client asking for some tips on risk management. The client was distressed with his performance and inability to successfully trade the markets and was looking for some feedback. I put together a response and thought it might be helpful to share my thoughts on the matter. The following is my response:

What you speak of is one of the most challenging things about being a successful trader….it is not easy and comes down to maintaining a very firm discipline…..the best I can explain is that intuitively, a trader will look to be fearful in a winning position and hopeful in a losing position…this is why most unsuccessful traders will get poor results….they are hopeful when they are losing and hold onto the position and yet the second they see any profit they are fearful and quick to take it off….this obviously skews risk/reward and makes for a bad strategy…..a lot of this stems from a lack of confidence….

What you need to do is to flip that around and be fearful in losing positions and hopeful in winning positions…this is really the secret….the best way to do this is to make sure you take only trades you love…..then determine where you would like to see the trade go..and let the trade play out..while also being very firm with your stop-loss…do not take profit ahead of what you decided (provided you still love the trade), and also try and not watch the market every second of the day…..another way to effectively implement this strategy is to make sure that your position size is not too big…one way to do this is to take the “Pillow Test”, a rule I came up with years ago which says that if you can’t sleep at night then your position is too big and you won’t be able to think clearly…..so reduce the size until you can sleep soundly on your pillow :)…

 

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The latest round of setbacks have stalled ahead of some key multi-week support by 1.3000 and from here we still can not rule out risks for additional consolidation above 1.3000, before considering bearish resumption. Ultimately, any rallies towards 1.3300 should be well capped, while a break and daily close back under 1.3000 would accelerate declines to the early 2012 lows at 1.2660.

USD/JPY: The latest pullback from the 2012, 84.20 highs was viewed as corrective and it looks as though the market has finally found some solid support ahead of 80.00. The setbacks have stalled by the top of the daily and weekly Ichimoku clouds and we look for the formation of a fresh medium-term higher low somewhere around 80.00 ahead of the next major upside extension back towards and eventually through 84.20. Overall, this is a market that has undergone a major structural shift in recent months and we now see the pair in the early stages of a longer-term up-trend. Ultimately, only a weekly close back under 78.00 would negate.

GBP/USD: The recent break back above 1.6000 now opens the door for fresh upside towards the October 2011 peak at 1.6150. However, any additional gains beyond 1.6150 should prove hard to come by, and we once again see risks for a bearish reversal in favor of renewed weakness back down towards key support by 1.5800. A break and close below 1.5800 will then accelerate declines. Ultimately, only a weekly close above 1.6150 would negate underlying bearish bias.

USD/CHF: Our core constructive outlook remains well intact, with the latest setbacks very well supported by psychological barriers at 0.9000. It now seems as though the market could be looking to carve a fresh higher low, and we will be watching for additional upside back towards the recent range highs at 0.9335 over the coming sessions. Above 0.9335 should accelerate gains towards the 2012 highs by 0.9600 further up. Ultimately, only back under 0.9000 delays and gives reason for pause.

— Written by Joel Kruger, Technical Currency Strategist

To contact Joel Kruger, email jskruger@dailyfx.com. Follow me on Twitter @JoelKruger

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