David Dixon is Chief Dealer & Analyst at Viper Wealth Creation. Between 2000 – 2006 he was advising corporate and private clients on various financial matters. Starting from 2006 he’s been trading his own book and training Viper delegates.
The month of December is almost upon us and is well known for volatility on reduced market liquidity as we draw closer to the end of the year. This year has the potential for some serious moves as we navigate through various central bank meetings, most notably because the market harbours expectations for a hike from the US Fed and further easing from the European Central Bank (ECB).
The Forex market has been all about a stronger Greenback across the board with a weaker euro throughout this year and when the divergence of interest rates play will come to an end. So could these two expected events, assuming they happen. mark the end of this or will we see more of the same ahead?
Last week saw the EUR/USD start the week just above 1.0600 and end the week just below at 1.0585. The pair rallied to a high of 1.0685 and a low of 1.0567 so we had a relatively quiet trading week as traders looked to this coming week which includes the ECB meeting and press conference on Thursday and US Non Farm payrolls on Friday.
ECB rate decision key to near term ranges in EUR/USD
Looking in the rear view mirror it is worth noting that since the 15th October the EUR/USD has fallen from the top of the then trading range of 1.1450 to 1.0800 that held from late May, breaking through the base of the old range on 6th November. The market briefly tested former support turned resistance close to 1.08 on 13th November. To put this into context, a trading range of 650 pips that held for 5 ½ to 6 months has now been broken with a further 200 pips or so to the lower side and has tested but not re-entered the old range since exiting 4 weeks ago. We have come quite a long way in a relatively short time mainly on signposting by Mario Draghi of what the ECB is likely to implement at this week’s meeting and the results of last month’s NFP release.
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So with an eye to previous disappointments e.g. Fed no hike in September, maybe the market is getting carried away in the short-term and even if not it seems highly likely we already pricing in a Fed hike and ECB easing in the coming weeks.
I am concerned that a correction is coming after 850 pips of one way traffic and the not unreasonable assumption that many players are going to look to close or reduce positions on their trading books for the year end soon. I have reduced outstanding positions in the single currency to small ahead of the meeting and I am considering a “hedge” against that by buying euros against a currency I believe has further room to fall in the short-term, sterling.
The euro against the rest of the trading board
I am staying short EUR/JPY (entered at 134.25) as a long-term play as mentioned last week, but I am considering a short-term “hedge” in buying EUR/GBP near 0.7000. This cross has been in a wide range of 0.74/0.70 since February and although briefly below on a couple of occasions, has not significantly exited the range. Sterling itself looks easier headed below 1.5000 against US$ and if as I suspect there is to be a correction in the euro, then EUR/GBP has the potential to yield good returns with a limited downside. Ok, this may cost me some pips if euros do fall further but does insulate some of my pips gain in a pair that I believe has reasonable upside potential.
Looking further afield the Aussie may benefit from no change to their cash rate when the RBA meets on Tuesday, but I expect to hold the resistance at 0.7300 and see any push towards this level as a chance to be short against the Greenback into 2016 when I expect AUD/USD to fall close towards 0.60. This will not be a quick fall so look to play in stages and pick up profits if holds 0.7100 as bottom of range in the short-term and re-instate later. The China devaluation story could well have further to go and the fallout will likely impact the Aussie to the downside.
To sum up, we are approaching a very important trading week with much of the “Divergence play” priced in there is room for disappointment which may see the market even re-test the old support turned resistance at 1.0800 in EUR/USD, so be wary of holding too much going in to the ECB meeting. The NFP could also disappoint while it is likely that the upside short-term potential for US$ strength is limited before the Fed meeting on 16th December (more on this next week).