We have passed through a year of tremendous uncertainties, persistent momentum and unusual market conditions. Looking ahead to 2013, major changes to underlying activity levels and long-standing trends present considerable trade potential. Below are the DailyFX Top Trading Opportunities of 2013.
John Kicklighter, Chief Currency Strategist
CADJPY | EURCHF – Preempting the Return of Confidence, Carry Trade
David Rodriguez, Quantitative Strategist
USDJPY – Reactions to Fed Policy Easing Sets Top Trade of 2013
Jamie Saettele, CMT, Senior Technical Strategist
EURAUD | AUDNZD – Aussie Dollar Has a Lot of Room to Turn
Ilya Spivak, Currency Strategist
EURSEK | AUDNZD – Looking Past Risk Trends for Classic Yield-Based Trades
Michael Boutros, Currency Strategist
GBPUSD | GBPJPY – British Pound Consolidation to Unravel- Look Higher in 2013 on BoE
David Song, Currency Analyst
EURGBP | AUDNZD – Sticking With Long-Term Trends In 2013
Christopher Vecchio, Currency Analyst
GBPCAD – Stay Away from Carney!
John Kicklighter, Chief Currency Strategist
CADJPY | EURCHF – Preempting the Return of Confidence, Carry Trade
Looking ahead to 2013, there is a lot of tumult that must still be worked out of the system. The further the economic slowdown continues through the opening part of the year, the greater its effects will be in exacerbating a complicated situation where yields are extremely low, fiscal rebalancing is stalled, financial stability in otherwise sound economies tremors, speculative capital remains on the sideline and volatility is revived. I am of the firm belief that a stimulus-led advance in capital markets these past months and years will see a serious correction to bring markets back to ‘fair value’.
That will certainly have an impact on CADJPY, but this isn’t a pair with too much risk premium behind it. I am looking for a pullback from this pair in order to enter a long position that can last for many weeks and potentially months. Entry may be 80 or 75 depending on how strong a risk aversion drive proves. However, risk aversion will likely only drive the markets so far as speculative participation has dropped to a 15-year low (fewer people to exit the markets). This pair is one of the best positioned to curb the pullback and leverage its advance. From the Canadian dollar’s side, the BoC is perhaps the most hawkish central bank and the IMF have put the currency under review for a reserve status. For the yen, carry unwind is a risk (pushing the funding currency higher); but the government’s effort to devalue and dedication to a low-yield regime through the foreseeable future sets the take off for carry interest well before risk appetite takes off.
CADJPY Weekly
EURCHF happened to be my worst trading mistake for the past year…and it is also one of my top setups in 2013. Having waited for nearly five months in high leverage for this pair to finally pick up off of its 1.2000 floor this past September; I let greed take over and tried to reposition at a lower entry when the market made its first consistent drive off of support. Moving forward, I believe Euro-area trouble will see at least one or two more serious swells before the market can see a steady way forward for the battered region. Whether the ‘tail risk’ comes from an outcry for ‘equal treatment’ from other rescued EU members looking for conditions as favorable as what Greece was offered or a sudden loss of cabin pressure for Spain’s financing, the impact on EURCHF will be the same: a drop as capital is transferred out of the troubled Euro-region and into the safety of the Swiss banking sector.
The SNB has vowed to keep secure the floor it imposed back in September of 2011, and I don’t doubt it will continue to hold. I am looking for entry close to 1.2000; and given the one-sided market, I am prepared to take leverage beyond my normal maximum. If, we cannot return all the way back to this well-trodden base, I will start looking for higher entry; but the size will be within my normal range. It may take time for the debt and fiscal crises in Europe to work through, but this pair offers an unusually resilient level of support to wait out that eventuality.
EURCHF Daily
David Rodriguez, Quantitative Strategist
USDJPY – Reactions to Fed Policy Easing Sets Top Trade of 2013
Last year I said that I thought a USDJPY long would be a top trade for 2012, and I believe 2013 will be another good year for the recently high-flying pair. Its direction has been anything but straightforward, but it is poised to finish the year 8 percent above where it began. The reasons are simple: Japanese politicians will look for JPY depreciation and US yields seem likely to head higher.
The Japanese Yen remains one of the most interest rate-sensitive currencies in the world. The fact that US Treasury Yields have tumbled to record lows has played a large part in similar historic lows in the USDJPY. Yet the US Federal Reserve recently announced that it would offer further stimulus to keep interest rates lower through the foreseeable future. How did markets react? Pushing long-term yields higher.
On yields alone, I like the USDJPY trade. Traders should be careful of the fact that the JPY-short (USDJPY-long) trade has gotten quite crowded as of late, and corrections are likely. Yet I would like to buy any further dips in the USDJPY as I think the reversal in long-term US yields and Japanese politics will leave the uptrend intact.
Jamie Saettele, CMT, Senior Technical Strategist
EURAUD | AUDNZD – Aussie Dollar Has a Lot of Room to Turn
From December 2008 to August 2012, the EURAUD declined from 2.10 to 1.16. Recent developments offer an opportunity play for a substantial retracement of that decline. The trend line that extends off of highs from December 2008 and September 2011 served as support at the low in August. The rally from that August low is sharp, impulsive, and resulted in extremely high RSI levels on the daily. Contrary to popular belief, extremely high momentum readings often signal the beginning or middle of a move rather than the end (this is why momentum often diverges with price at turns). The decline into mid-November retraced slightly more than half of the advance from August. The February low reinforces the area as one of importance. Trading through 13029 would warrant a breakout strategy for continuation towards 14300 and 15200-15450. Keep this on your watch list in 2013.
EURAUD Weekly
Prepared by Jamie Saettele, CMT
Sticking with a bearish Australian Dollar theme, the AUDNZD is confirming a multiyear head and shoulders top (right now). Bears are back for more after a false break in February. The implications from this pattern are for a breakdown towards the head and shoulders objective near 11000. 11800 (100% extension of the decline from the 2011 high) is probably support ahead of the objective.
AUDNZD Weekly
Prepared by Jamie Saettele, CMT
Ilya Spivak, Currency Strategist
EURSEK | AUDNZD – Looking Past Risk Trends for Classic Yield-Based Trades
The Euro was spared the challenge of contending with a dovish ECB despite the onset of recession in the Eurozone as the central bank spent much of the year preoccupied with repairing the conduits of policy transmission torn by the region’s debt crisis. The threat of a disorderly Greek exit from the single currency bloc is now receding once again while retreating bond yields in Spain and Italy – the largest of the so-called “PIIGS” and thereby the most disconcerting – reflect deflating fears of an imminent existential crisis. While this bodes well for sovereign stability, it likewise opens the door for the ECB to reorient its efforts toward rebooting growth as shrinking risk premiums create an opening for effective monetary stimulus.
A short EURSEK position offers exposure to this theme. The trade reflects the negative yield implications of a dovish shift in ECB policy on the Euro itself while capturing the supportive effects such a scenario would have on demand within the currency bloc. Indeed, Sweden is a major exporter to the Eurozone, meaning a pickup in the common currency region would be supportive for growth and help interest rates. Indeed, priced-in expectations suggest Riksbank will conclude its easing cycle before the turn of the calendar year with a final 25bps rate cut at the December policy meeting, with 2013 spent on hold. In an environment where the ECB takes a looser posture, this opens the door EURSEK to reverse lower as the yield gap between the two currencies narrows in favor of the Swedish unit.
EURSEK Daily
Meanwhile, the Australia – New Zealand yield gap is expected to continue to narrow, putting downward pressure on AUDNZD. Traders continue to price in a considerable amount of RBA easing in the year ahead while its Kiwi counterpart remains on hold. Recent comments from newly-minted RBNZ Governor Graeme Wheeler suggest his appointment did not mark a dovish shift from predecessor Alan Bollard, with both leaders apparently seeing economic growth support from rebuilding efforts in Canterbury as reason enough to keep rates on hold. Meanwhile, the RBA’s Glenn Stevens has become increasingly vocal about the tightening impact of the elevated exchange rate, hinting the RBA may be starting to see other countries’ QE policies as unnaturally amplifying yield-based demand for the Aussie and crafting a policy response. Continued uncertainty on the risk appetite front reinforce the appeal of AUDNZD. Both of the currencies in the pair are risk-oriented, so when you take one against the other that element is factored out to a large extend and relative monetary policy expectations can truly shine as the engines of price action.
AUDNZD Weekly
Michael Boutros, Currency Strategist
GBPUSD | GBPJPY – British Pound Consolidation to Unravel- Look Higher in 2013 on BoE
Beyond the market dynamics that drove price action throughout 2012, the British Pound looks poised to outperform next year amid the shift in the policy outlook. From a fundamental standpoint, it seems that the Bank of England is likely to stand-pat on further easing measures as inflationary concerns continue to limit the central bank’s scope for more quantitative easing. Indeed, Sir Mervyn King cited expectations for inflation to run above the 2% target over the next 18-months, posing a barrier to further policy stimulus. In turn, a growing number of central bank officials may adopt a more hawkish tone in 2013 as the Funding for Lending scheme begins to work its way through the real economy.
At the December FOMC meeting, Bernanke announced a significant shift in the central bank’s easing policy with the chairman pledging $85 billion a month in liquidity injections at the conclusion of Operation Twist at the end of this year. The Fed now looks to maintain its accommodative stance so long as inflation remains below 2.5% and unemployment remains above 6.5%. However with the individual FOMC projections suggesting that inflation will run at or below 2% in the long-run, the focus will remain fixated on the labor market. As such, Dollar strength may remain limited in the short-run until there is significant improvement in the unemployment rate, further supporting our bias for a stronger Pound.
GBPUSD Weekly
The British Pound is up more than 3.6% this year with the GBPUSD pushing off key support at the 23.6% long-term Fibonacci retracement taken from the late-2007 decline. This level has held as support since July of 2010 and will serve as a key threshold as we head into the 2013. A look at the encompassing structure sees the pair continuing to consolidate into the apex of a triangle formation dating back to the 2009 lows with key resistance seen at the confluence of triangle resistance at the 38.2% retracement at 1.6455. Look for a breach above this level to expose topside targets at the 50% retracement at the 1.7050 pivot level and the 50% retracement at 1.7350 with extended break targets eying the key 61.8% retracement at 1.8250. Only a break below the 23.6% retracement at 1.5340 invalidates our broader directional bias. Note that the weekly RSI has continued to hold above the 40-threshold with the oscillator making multiple rebounds off RSI trend line support dating back to the 2009 lows. Numerous breaches above the 60-threshold suggests that momentum continues to favor topside advances with a breach above highs offering further conviction on a move past the 1.6455 threshold.
GBPJPY Weekly
The GBPJPY is also a pair of interest moving into 2013 as Yen losses are likely to be accelerated by aggressive policy easing from the Bank of Japan. The pair recently compromised trend line resistance dating back to the 2009 highs with three rejections of the 120-handle over the past four years offering conviction on longs against this mark. Key near-term resistance stands at the 100% Fibonacci extension taken from the 2011 and 2012 lows at 135.40 with a break above this threshold eying targets between the 161.8% extension and the 23.6% retracement taken from the 2007 decline at 145.70-148.50. Only a weekly close below the 126 pivot level invalidates our broader directional bias.
David Song, Currency Analyst
EURGBP | AUDNZD – Sticking With Long-Term Trends In 2013
Coming into 2012, I held a bearish outlook for the EURGBP as the debt crisis dampened the outlook for the Euro-area, and the pair should resume the decline from 2011 amid the deviation in the policy outlook. As the deepening recession in Europe threatens price stability, we should see the European Central Bank (ECB) continue to embark on its easing cycle in the year ahead. In turn, the Governing Council looks poised to push the benchmark interest rate to a fresh record-low in an effort to stem the downside risks surrounding the region. In contrast, we saw the Bank of England (BoE) drop its dovish tone for monetary policy amid the stickiness in price growth. It seems as though the Monetary Policy Committee will stick to the sidelines throughout the first-half of 2013 as inflation is expected to hold above 2% over the next two-years. In turn, a growing number of BoE officials may start to discuss a tentative exit strategy in the coming months and I will preserve a bearish forecast for the EURGBP as the pair persistently carves out a lower top ahead of the New Year. As the EURGBP remains capped around the 0.8150 figure, the weakening outlook for the euro-area should lead the pair to give back the rebound from the October 2008 low (0.7693). Additionally, we may see the Sterling outperform next year as the BoE looks to address the risk for inflation.
At the same time, I’m holding a similar outlook for the AUDNZD as I anticipate the Reserve Bank of Australia (RBA) to carry its easing cycle into the following year. The Reserve Bank of New Zealand (RBNZ) appears to be softening its dovish tone for monetary policy amid the growing threat for an asset bubble. As the rebuilding efforts from the Christchurch earthquake gets underway, record-low borrowing costs have fueled private sector credit on the back of rising home prices. RBNZ Governor Graeme Wheeler may see scope to lift the cash rate from 2.50% in order to balance the risks surrounding the fundamental outlook. On the other hand, the RBA may have little choice but to provide additional monetary stimulus as China – Australia’s largest trading partner – face a risk for a ‘hard landing,’ and central bank Governor, Glenn Stevens, may push the key rate beyond the 49-year low as commercial banks in the $1T economy remain reluctant to pass-on the rate cuts from 2012. With the AUDNZD carving out a major top in 2011, the downward trend in the exchange rate should continue to take shape in the year ahead. The pair may ultimately give back the rebound from 2010 as the outlook for monetary policy reinforces a bearish forecast for the Aussie-Kiwi.
Christopher Vecchio, Currency Analyst
GBPCAD – Stay Away from Carney!
The GBPCAD has fallen over 5000-pips the past four years, but the move lower may not be done. A look at the charts shows a Symmetrical Triangle (perhaps alternately viewed as a multiyear Bear Flag) forming off of significant lows; the chart is suggesting that the pattern could break to the downside for new lows. Considering that the termination point of this pattern comes in August 2013, a setup for a move to new lows may present itself sometime in 2Q’13. A move towards 1.4000 could be obtained by 4Q’13.
Ideally, a fundamental catalyst would present itself to help jumpstart a sell-off. Thankfully, Bank of England Governor, Mark Carney, is leaving his post to take the same position at the Bank of England in July 2013. This is important for two reasons: Governor Carney has endorsed a nominal GDP targeting plan, which would mean endless amounts of stimulus to obtain a desired level of economic growth, or essentially, a planned economy; while the British economy is facing a very undesirable situation of low growth, high inflation, and high unemployment, a situation known as stagflation. Few efforts by the BoE have been meaningful thus far, and with Chancellor of the Exchequer recently declaring that another year of austerity would be necessary, the United Kingdom’s level of credit worthiness will necessarily come into question; a reduction from its esteemed ‘AAA’ rating would damage the Pound.
This trade is more or less about playing British Pound weakness; and with the Canadian economy resilient, and a soon-to-be very dovish Mark Carney taking over the Bank of England governorship, the GBPCAD is indeed poised to trade lower throughout 2013.
Written by the DailyFX Research Team
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