Weekly review.. Forex volatility set to continue as liquidity drains

  • Weekly gains and losses may have been reasonably subdued but last weeks price action once again highlighted how even in  EUR/USD volatility has become enhanced in both directions as liquidity suddenly disappears. In two weeks we seem to have had a ‘melt up’ and a ‘melt down’ all be it within recent ranges.
  • Be prepared for more of the same and with 13×13 bounce house 2 massive events, Greece and US Employment data set to hit pre Easter markets I wouldn’t be gob smacked to see EUR/USD hit 1.0450 or 1.1450. Now that’s possibly an exaggeration , certainly on the upside but we have to look at two possible scenarios that can emerge this week.
  • US Employment data.
  • With the Fed seemingly watching the data markets will do likewise. Next Fridays release of Non Farm Payroll could see some major reactions in thin markets if it is way above or below the 250/- figure. Likewise the headline unemployment level of 5.5% is not expected to change but we know the vagaries of statistics could throw up something different. Who knows? even the highly paid Bank economists are sometimes wildly out on their estimates.
  • Greece.. The final final set of reforms and measures are due from Greece. The game of chicken between them and the rest of the EZ has surely to reach some conclusion this week even if it is temporary. The bottom line is that if Greece cannot convince Finance Ministers and therefore the ECB that its doing enough or going to do enough then they will rune out of cash to pay creditors. An agreement of sorts is very much expected but you cannot rule out something that nudges us even closer to a Grexit.
  • BOTH the above events could affect EUR/USD in a major way.
  • 1. Positive news on Greece and weak NFP could propel EUR/USD to at least a test of 1.11. As I said I wouldn’t rule out a higher level following a break of that as EUR shorts and USD longs remain the biggest positions.
  • 2. A breakdown over Greek proposals and strong US employment data could give us the other scenario of a test of recent lows around 1.0460. A real crisis with Greece in terms of a Grexit looking more certain could propel us to support around 1.0250
  • Lets throw in some more risk aversion or maybe the opposite a quick turn around in equities next week and we have more ingredients to add to the uncertain but volatile possibilities. Personally I will stick with very small GBP and EUR shorts against the USD but look to trade any knee-Jerk moves  buying dips and selling rallies in those pairs provided there isn’t any major event ( Grexit ) . There is after all a small chance that Greek banks might close for Easter and have credit controls when they re-open.
Market summary.
  • Forex..With risk appetite stumbling ( US indices down over 2%) it was the JPY and CHF which rallied most. USD/JPY closed at 119.12 ( up 0.8%) but not before testing 118.20 support. I would still not rubbish those that thing a break down to 115 is possible. EUR/USD closed at 1.0887 ( up 0.6% ) having had a mini collapse mid week from 1.10 plus down to 1.08. Nothing to suggest at these levels. The pound continued to be the weakest link, GBP/USD 1.4875 ( down 0.5%) maybe politics affecting the currency at last. I don’t see much scope for an aggressive bounce in GBP/USD even if EUR/USD rallies substantially. Elsewhere AUD 0.7750 and CAD 1.2611 were both weaker against the USD ( 0.3 and 0.5% ) so like GBP losing more ground against the JPY and EUR last week.
  • Commodities..Gold shone ( up 1.4% on the week at $ 1200) but Oil closed lower on Friday ( $48.90) and some are still predicting a blow out lower. AUD and CAD will continue to be weighed by commodity price falls.
  • Equities.. Not a good week for stocks with US indices down over 2% on the week. However, a bounce from here would not surprise on past form and some major catalyst for a big fall does not seem imminent. Maybe famous last words with a Grexit still possible but with ECB QE started markets will be quick to recover if Greece buys some time.
  • Bonds..US treasury yields bounced then fell back with the 10 YR. closing in the middle of its range at 1.95. It’s a bit headless chicken stuff all be it in narrow ranges as market participants hang on every word of Mrs. Yellen. She’s made it clear though, watch the data and that means NFP and wages rather than inflation.
Next Weeks Trading strategy
  • A big week as I have said with the danger of diminished liquidity. EZ CPI, Chinese PMI are just some of the numbers before Fridays NFP numbers from the US. Be careful on stop orders, you could end up cursing and I prefer to buy USD dips and trim small positions on rallies unless we really get a game changer. In any event we should get some decent volatility. As I have said before if you don’t like that you shouldn’t trade forex.
  • A tragic last week which made us all think. We are all at the mercy of other people whether we like it or not.
  • I travelled to Dublin Friday to see one of Michael Flatley’s last performances in ‘ Lord of the Dance ‘ . Fantastic dancing and taking tap dancing to a new level. Some fancy footwork maybe required in Europe to get a settlement on Greece too.

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