USDCHF, EURCAD and GBPCAD update

Previously, I shorted the EURCAD and GBPCAD. Now around a week later, I'm covering these positions for a very nice level of profit.

Below we can see the two charts and the short entry positions highlighted by a horizontal level

EURCAD

"The first chart - 4 hour - shows how the EURCAD has become overbought on slow stochastics and in my opinion we are due a test of  1.392 in the not too distant future." From here

As we can see the ~0.9% drop came very quickly and ended up being a pain free, simple trade.

GBPCAD

Furthermore, I covered GBPCAD when EURCAD reached my 1.3920 target and unfortunately due to BoE Carney's speech and the movement in the EURGBP this trade only returned 0.7%

Overall, These shorts played out well, and even though the bottom of the move (so far) wasn't reached by my trade it still had little drawdown and good return profile.

USDCHF

This trade was is all about a good idea but poor timing, while it still returned 0.57% in the end, the returns would have been ~3x this had I been patient with my entrance.

EURCAD and GBPCAD charts

First off a look at EURCAD

The first chart - 4 hour - shows how the EURCAD has become overbought on slow stochastics and in my opinion we are due a test of  1.392 in the not too distant future.

Next we move to a daily chart which has been annotated with various trendlines to show areas of support and resistance, what we see with the daily doji candle, it appears on a failed breakout of a long term trendline showing lack of momentum with the recent move higher and therefore a drop off is likely

finally a look at a longer term view, I've included a fair value model (loosely based on Citi's) which shows (based on yield curve spreads) where the EURCAD should be trading.

As we can see, while there are often divergences (2011) the two come together, and as it stands the EURCAD is far above the fair value model.

Similarly with the EURCAD, the GBPCAD has seen a strong daily reversal pattern emerge.

Circled, can be seen the last time this pattern emerged, previously the GBPCAD fell, but what we've now is a much greater magnitude move higher and so combined with the stochastics, there should be a much greater move lower.

Next on is a longer term look at the GBPCAD and we can see that price tested the ceiling that has been in place since 2010 and failed spectacularly.

Overall, from what I see here there is strong evidence to short both EURCAD and GBPCAD - personally I'm already short, but of course I still believe it is a strong opportunity from here and so would advocate shorts on the open during NZ tomorrow and look for a move lower, 1.385 in EURCAD and 1.61 GBPCAD.

Time to get long the dollar

With the bond markets fully expecting the tapering to occur in September, with 10Y benchmarks at the highest level in 2 year, it is somewhat surprising that the FX markets are seeing an almost opposite scenario playing out. The USD has been one of the weakest currencies in the last month but now as we head into an FOMC meeting this Wednesday and further ahead into the likely tapering in September.

What we see therefore is both a technical and fundamental play for the USDCHF pair. Combining this bullish USD fundamentals and then the following technical levels.

As we can see here, the USDCHF is building a rather clean, impressive Inverse Head & shoulders formation. Stochastics lay in the oversold area and are showing signs of moving higher. Below we see a daily chart and can see how there is a strong supporting trendline which will act as our stop level.

Overall we can see that a long at 0.9250, with an initial target at 0.94, and from there 0.96 seems like a sensible trade to potentially get the best of the fundamental shift towards USD.

As always, a protective stop on a close below 0.9175 is recommended.

Ibex ready to rally to 11,500?

Lets be clear - Spain's economy isn't ideal. With Unemployment sitting at 26.3% and showing now structurally promising signs for a reversal. Retail sales still sit at -4.95% y/y and starting to turn lower, but one message we have seen from nearly all equity markets over the last few years is that they really don't care about the fundamentals, and therefore from a technical perspective we could be set for an impressive rally.

But below we can see a rather important level in the IBEX which will prove pivotal over the next 6-9 months

IBEX, daily. Thomson Reuters

What we see is a typical bottoming formation, an inverted H&S, but as we stand there is the neckline standing were we closed on Friday, furthermore there is a strong downward trendline sitting a few points above market. So here is the Technical set-up.

Next we can see the IBEX vs. the Spanish 10 year benchmark and for obvious reasons they would correlate highly - but what we've seen is the two diverge with Spanish debt relatively outperform Equity and so we have an opportunity here to hedge our potential long IBEX trade which would be short ES 10 futures / cash.

With the 10's standing at 4.48% we could potentially see this underperform Equity in the coming months as we see the two lines converge.

So our set-up is as follows, buy the IBEX on a daily close above 8,800 and simultaneously short Spanish 10 year debt. As we are not quite at this stage we have to follow but it may be reasonably close.

BoE and the UK economy

Today marked the first inflation report for the new BoE governor Carney, the main headlines were as follows

BANK OF ENGLAND MPC SAYS ADOPTS FORWARD GUIDANCE, WILL NOT RAISE INTEREST RATES UNTIL UNEMPLOYMENT FALLS TO 7 PCT

 BOE STANDS READY TO BUY MORE GILTS IF NEEDED, WILL NOT REVERSE QE AND WILL REINVEST MATURING GILTS WHILE UNEMPLOYMENT ABOVE 7 PCT

 BOE AUGUST INFLATION REPORT FORECASTS UK UNEMPLOYMENT RATE TO STAY ABOVE 7 PCT UNTIL AT LEAST Q3 2016

These statements summarize the change of plan from the BoE and the financial markets most certainly moved - this being said, the majority of anaylsts expected forward guidance based on U/E so it wasn't that shocking. First off the reaction in the GBP.

1 min GBPUSD - Thomson Reuters.

As we can see there was quite a move totalling about 320 pips from high to low, while most of the action was here the gilts were quite active also.

10Y gilt tick chart - Thomson Reuters.

We had about a 11.6bps range in trading today however by the end of the session the gilt yield was little changed.

FTSE 100 cash - Thomson Reuters.

The FTSE took a bit of a hit today dropping 1.4%.

Short Sterling Dec 15. Thomson Reuters

With an almost 30 tick range short sterlings had a wild day. Going from an implied rate of 1.05% to 1.3% for December 2015 over the course of the day.

As Interest rates were the main topic of discussion here, I'll focus on this. After the forward guidance was issued that the BoE would consider pulling back on stimulus after 7% U/E was reached, the markets actually pushed forward the expected date of a rate hike - completely the opposite of what Carney had intended. This is most likely because of the recent flurry of strong Economic data from the UK and so 7% U/E may be closer than we, or the BoE think.

For this reason there was this peculiar reaction to what was intended on being a dovish statement, from this analysis the reaction across the markets is clearly justified with cable rising on the hope of higher interest rates, the same reason FTSE and Gilts moved.

GDP vs Inverted Unemployment rate. Thomson Reuters

This final chart shows the relationship between GDP and the rate of U/E, and while not perfect there is definitely something there, and from this one would expect to see the U/E rate edge towards 7% as growth reaches 2.5% which is very reasonable and somewhat expected next year.

Overall, today's announcement did jitter the markets but it wasn't a surprise and so going forward I don't expect this to change much from the overall outlook which is that the FTSE and gilts will do whatever the DAX, Dow and UST's do. the GBP will struggle to go much higher and the move already was a tad exacerbated on short covering and short sterlings will likely recover as the BoE holds firm on its statement.

AUD long idea

As we stand now weekly stochastics signal the most oversold AUDUSD since 2004, well below the levels seen in 2008, RSI is at similar levels and recent CoT data has shown us that there are record shorts in the AUDUSD. For this reason getting long on a contrary play is my main trade for the summer months (and for the next two weeks while I'm on holiday).

However I'm not just going to be buying AUDUSD, but also AUDNZD as a lower risk trade due to the highly correlated tendencies of this ccy's

Here shows the weekly chart with very support candles and with Stochastics very smoothly signalling a move higher. Both previous oversold stochastics signals have yield great results, same with RSI.

Now a look at the candles, here is the inverted hammer in theory

Here is the weekly set-up

We can see clearly from this how similar the reversal pattern is to the current AUDUSD set-up.

As it stands, the AUDUSD has just popped over 0.91, but as I started typing we were 0.9090, and this is where I bought in. As can be seen from the chart there is a horizontal level at 0.9385, at this will be my target +/- 15 pips. 

It also coincides with key fib levels of the move down and seems like a sensible target representing good R:R and strong probabilities. The AUDNZD will follow the AUDUSD but with a small beta and so at 1.1650 I'm getting long for a move to 1.18.

These trades are risk positive and this is the major headline risk with this trade - a stock sell-off will definelty hurt this trade but China seemingly won't any more. After a miss in CNY GDP the AUD has still managed to rally and this for me shows a fundamental shift in AUD outlook. For these reasons stops discretionary but somewhere around previous swing low 0.8950 or so.

Markets post Bernanke

Well we've seen a rather interesting shift in stance from the Fed. In my opinion the key headline was;

BERNANKE SAYS INFLATION, JOBS SIGNAL MORE FED STIMULUS NEEDED

In essence this has put back the expectations for tapering by a few months, but that will come. The bond markets, stocks, metals and FX trading like penny stocks as Ben spoke during a Q&A session, with the EUR trading 1.3010 from 1.2880 pre-speech and 1.2840 pre-FOMC.

As an update to a previously mentioned long 10 year trade, I've closed out on this recent spike at 125*22,just over a point in price and a nice 12bps. (I do believe it will likely rise and 2.5% on 10's is going to happen, just covering to take this one directional risk off the table).

Furthermore as the Dollar has absolutely crashed, I've also covered the short DX sep futures trade for a very healthy profit, but I've also decided to flip this trade as I see this move washed a lot of Dollar bulls out and now we should stabilize around 1.30 in the EUR (key fib level). I think the bias is still to the downside for the EUR so the USD should be supported but we have to see. 

Overall some very nice trades and now we have to look ahead. Bearing in mind, nothing has changed, it's just the EUR is at a 250 pip discount to yesterday AM.