The Big Picture: February 27, 2012 Global Currency Review (FXE, UUP, FXA, FXY, EUO, FXB, FXC)
Bryan Rich: In my last Friday afternoon chart review, the EURUSD was sitting in the middle of the February range and the uncertainty remained high surrounding the 2nd Greek bailout.
With that, I said the euro was setting up for a sustained breakout, but the direction was a coin flip. Given the magnitude of the outcome from the euro zone meetings this past week though, I said whichever the direction of the break, it’s likely a direction that you want to go with.
And given the influence the euro crisis has had on global markets, it was safe to expect the direction of the euro to determine the broad direction of other markets.
In last week’s review of the charts, I said if we broke above the 1.3322 level in the EURUSD (the highs of the month) it would confirm a C-wave of a corrective ABC pattern (an Elliott Wave pattern).
I also said this C-wave would project a move between 1.3600 and 1.3700 by the end of March — assuming it follows the same slope we’ve seen in the A-wave, from the Jan lows to the Feb highs. Here’s a look at that chart from my analysis from Feb 17.
We got that break on Thursday of this past week (above the orange line in the following chart).
So with this break, the markets are telling us that the Euro officials have done enough to convince us that Greece will at least get to the end of March — when the big tranche of debt is due to be refinanced.
With that, this pattern projects a move to the top part of this 10-month descending channel (the white channel) by the end of March.
Following that scenario, at that time, there will be two critical obstacles for Greece again. The first: Can they rollover 14 billion euros of debt in March? That would mean they have convinced EU and IMF officials that they can implement reform. Second: In April, can they elect a new government that will carry out the reform in Austerity?
Those two issues are highly questionable. An inability for Greece to produce on both of these fronts would then set the EURUSD up for another fall from the top line of that channel.
I laid this scenario out last week, and it looks pretty good so far. The bailouts that were agreed to this week, came with a condition that the money for Greece would be held in a segregated account.
And that money can be pulled back at any time if EU/IMF officials believe Greece isn’t holding up their end of the deal. So the euro vulnerability is in-tact.
But with this past week’s strength in the euro, the breakout, in the meantime, is underway. And the euro crosses were among the biggest beneficiaries.
EURJPY led the way with the break higher in USDJPY in the past week. But it was more driven by the swing in the euro tide – as hedge funds that had been building very large short positions in the euro crosses started covering shorts and even flipping to long positions. EURGBP broke above this line this week (the white line in the chart below), and then EURCAD and EURAUD followed with similar bullish breaks.
Given the positive scenario that looks to be in play for the EURUSD in the near term, these euro crosses still have good upside. EURGBP still targets this 7-month trendline (the red line) and then the 200-day moving average (the yellow line).
EURGBP led the way for the euro crosses earlier in the week. And then EURCAD followed with a similar breakout (break of the white line). To end the week, it extended through the key 1.3400 area where prior lows offered good resistance (the orange line).
Finally, EURAUD followed the other two crosses by breaking out on Friday.
It all signals that the market is unwinding big euro shorts.
Speaking of the euro crosses, the one of the biggest movers in the currency complex for the week was in EURJPY. But before we look at EURJPY, let’s look at the longer term charts of USDJPY.
We’ve been watching this long-term downtrend line in USDJPY for some time (the red line) … anticipating this big trend break, and anticipating a major trend change as a result.
We watched USDJPY as it broke this line the first time in January. And then we watched as a large sell order came in in USDJPY just as it peaked before the 200 day moving average on its first move through this five year trendline. That was a top from that point, as it pulled back further following Bernanke’s warnings on January 25 of more QE prospects.
But when USDJPY neared 76.00, the BOJ/MOF, and those that act on their behalf (e.g. Kampo, a big Japanese life insurer), were there capping the downside in front of 76.00.
While it offered a good risk reward for a short term trade, knowing they were sitting on the bid down there, it was best to wait for some confirmation that USDJPY had new upside momentum, and as I said, the market wouldn’t get excited until we breached the 200 day moving average. When that level breached just above 78, it was off to the races. If you bought that break you should be close the 3 big figures (from 78 to 81) in the money on what looks like a major multi-year trend change in USDJPY.
Coming into this past week I was looking for the October intervention highs of 79.53 to break. That happened. And for USDJPY to surpass the August BOJ intervention induced highs of 80.24 99 (the first red line) — which it did.
Given the confusion surrounding Europe and the euro, market participants have indeed gotten excited about the yen trade. They’ve made money in it. And they continue to build big positions in the theme of a major trend change here.
And as I said last week, it all boils down the BOJ policy changes from Feb 14. The biggest deal: they set an inflation “expectation” – with that, they vowed to print yen until they dig their way out of deflation and hit a target of 1% inflation. That’s a clear enough message to get big players very excited to establish big short yen positions.
In EURJPY, we looked at two charts last week. And they both worked out nicely. As I said in the positive euro scenario I laid out, EURJPY was set on a path to reach its 200 day moving average (the yellow line).
The pattern we looked at last week, the inverse head and shoulders pattern, projected a move to the mid 1.07 area, just above the 200-day moving average. That level gave way Friday and EURJPY extended well beyond it.
For where it goes from here …we take a look at the second chart from last week. This is the daily chart going back to the 2008 highs.
EURJPY put in an all-time high of 169.96 back in 2008 and proceeded to fall all the way to sub 100 these past two months. On Friday, it broke that major four year downtrend, similar to the break we’ve seen in USDJPY.
The first major fib retracement of this big four year range comes in at 125. EURJPY goes out on Friday just shy of 109.
Finally a look at stocks here…
Given that the euro and stocks have traded in a close relationship throughout much of the crisis-era (2007- present), the bull break in the euro gives reason to believe stocks can break this 1340-1370 range. This range has proven to create several tops over the past year. Stocks closed on Friday 5 pts shy of breaking this 1370 level.
Taking a step back and looking at stocks … a big trendline already broke early this month (the red line in the chart below). And the moving averages have now turned BULLISH. The shorter term moving averages have crossed above the 200-day moving average … and the 200 day moving average is now rising — so a more bullish outlook for stocks here. A break above 1370 would get the stock bulls very excited again — and they are an excitable bunch.
So last week, in looking at the big picture, I left off saying that the euro held the keys to the direction for global markets — and that direction (for the euro), going into this week’s bailout meetings was “unclear.” But given the magnitude of the event and the critical position of Greece, and time-sensitive nature of the bailout posturing, I thought this week would give us a clear break one way or the other in the EURUSD…and I thought that was a break you would want to go with (i.e. follow).
That all looks to be the right call. The markets all seem to be setting up for a period where the euro recovers, stocks rally and the risk climate eases for a period. But I expect it all to come back under fire in late March.
Related Tickers: CurrencyShares Euro Trust (NYSEArca:FXE), PowerShares DB U.S. Dollar Index Bullish (NYSEArca:UUP), Rydex CurrencyShares Japanese Yen (NYSEArca:FXY), ProShares UltraShort Euro (NYSEArca:EUO), Rydex CurrencyShares British Pound (NYSEArca:FXB), Rydex CurrencyShares Canadian Dollar (NYSEArca:FXC), CurrencyShares Australian Dollar Trust (NYSEArca:FXA).
Bryan Rich is an entrepreneur and an accomplished currency specialist with more than 14-years of experience in trading, research, and consulting in the global foreign exchange markets. He is President of Logic Fund Management, a currency advisory and consulting firm. Bryan began his career as a trader for a $600 million family office hedge fund in London. The macro-oriented fund managed assets for a prominent European family. Later, he was a senior trader for a $750 million leading global macro hedge fund located in South Florida. There, he helped manage and trade a multi-billion dollar foreign exchange options portfolio. His consulting resume includes work for a boutique currency fund in New York, where he developed trading models and strategy for the core investment program of the company. He later joined the company as a partner, based in their Wall Street office. He has a BA from the University of North Florida and an MBA from Rollins College.
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