Asia Open: A Few Thoughts Out Loud

The U.S. dollar was sent sharply lower today as six of the world’s largest central banks – Fed, ECB, SNB, BoE, BoC, and BoJ, coordinated to lower USD swap rates by 50bps and extended the swap lines until Feb. 2013. This came on the back of last night’s PBoC RRR cut by 50bps which was an initial source of the euphoria. Lastly, the U.S. November ADP report came in at 206K vs. expected 130K and October’s number was revised higher to 130K (a gain of 20K), which amounted to further gains in the ‘risk on’ arena. The buck’s greatest losses came against the commodity currencies and Scandies (on the day AUD/USD: +2.83%, NZD/USD: 2.56%, USD/SEK: -1.89%, USD/CAD: - 1.44% and USD/NOK: -1.37%), meanwhile the currency which the coordinated efforts were designed to benefit the most (Euro) failed to gain even 1% ( EUR/USD finished +0.97%).

So does today’s actions materially change things? In a one word answer, no. However, I do believe traders and investors are beginning to distinguish between quality and inferior assets, rather than ‘buy everything’ or ‘sell everything’.

That said, rather than regurgitating the same ole, same ole regarding the EU situation, here’s a few my ‘thoughts out loud’ which I may consider should the opportunities present themselves over the coming days:

EUR/USD – I wouldn’t be shocked to see a 1.32-36 range persist until the ECB meeting & EU summit next week, however overall I would prefer to be shorting the Euro relative to the dollar. Today’s rally may not have been a bad one to sell into, but ideally I would prefer to see the 1.36-1.3650 area (38.2% retracement of the November decline and 55-day sma) as a more preferable level to establish a bearish bias. While further downside may be limited prior to the end of the year, I do think that in Q1 we could see another leg down for Euro towards to $1.25 or possibly even $1.20.

USD/JPY – Will the BoJ/MoF take further action and get more aggressive in terms of direct intervention into the markets – it wouldn’t surprise me. Consequently, I’d be thinking about longs on USD/JPY on a move back towards 77.00/20 (convergence of 50 & 100-day sma’s) and then looking for a break above long-term trendline resistance from the May 2010 high around 78.80. If this occurs, it wouldn’t shock me to see 80 by the end of the year and 81/82.00 sometime into mid-Q1 – See “ USD/JPY – Is it time to get bullish”.

USD/CHF – Recently ran back into the $0.9330 highs and backed off (potential double top?), however I could be inclined to get bullish on a move back towards 0.9000-50 (38.2% retracement of the November advance and 55-day sma) with the SNB keen on keeping the Swiss Franc weak – Keep an eye on the SNB’s meeting on Dec. 15th as there are rumors they could raise the EUR/CHF floor from 1.20 to 1.25

S&P500 – Today’s break above 1204 (55-day sma and 38.2% retracement using the 11/8 high and 11/25 low) was a major boon for ‘risk’ and a further continuation may ensue. Daily RSI broke above trendline resistance in advance to price, consequently I will be monitoring the 1248/50 level with great vigilance over the coming sessions.

For a final thought, it will be interesting to see how much of today's rally was simply 'window dressing' for the end of November. Thus, I'll be watching tomorrow's price action very carefully – U.S. ISM Manufacturing & Prices Paid as well as on Friday with the U.S Employment report. At the end of the day, I wouldn't be too surprised if a 'Santa Clause' rally here in the U.S. emerges over the coming weeks, but it may be coincided by a stagnant/slightly lower EUR/USD as markets could turn back to the traditional fundamentals (Improving US outlook = good for the USD and vice versa) or merely positive U.S data is ‘less bad’ for the buck.