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Forex Trading StrategiesMassive USD reversal on little news yesterday as market temperature suddenly rises. 1.1900 looks key for EUR/USD.
US Consumer Confidence and Durable Goods Orders up today. EUR/JPY closing in on 7-year highs at 141.60.
MAJOR HEADLINES – PREVIOUS SESSION
• US Existing Home Sales for October were out at a seasonally-adjusted annualized rate of 7.09M vs. 7.20M expected and 7.28M in September.
• Japan Jobless Rate spiked to 4.5% from 4.2%, apparently due to more people seeking work in a growing economy.
• Japan Workers' Household Spending rose 1.2% vs. 0.5% expected.
• Japan Industrial Production rose 0.6% vs. 1.3% expected.
• Japan Small Business Confidence rose to 50.9 in November vs. 50 in October.
EUR/USD spiked all the way to 1.1900 late yesterday before retreating as low as 1.1815 overnight. USD/JPY was as low as 118.35 yesterday before rising sharply again overnight.
THEMES TO WATCH – UPCOMING SESSION
Just when we throw in the towel on the bearish USD view, we get a day like yesterday - a day that really makes you sit up and take notice, because it saw massive movement with no real catalyst. There are many ways to interpret a day like yesterday. One way is to consider the timing: the market is heavily long the USD and a heavily positioned market can spike against the positioning as nervous players are unwilling to hold a position as it moves more and more against them and no new buyers come in because everyone has already place their bets. The fact that all of the data risks lie ahead makes players even more nervous. This scenario means that we could see yet another reversal lower if the US data this week shows consistent strength and the market responds accordingly.
Alternatively - this could be an early sign of trend exhaustion - one that is driven by an anticipation of drying HIA flows and justifiable worries about the US economy. It was interesting to see the about-face in the media on the US retail sales results, which were first heavily praised for the massive growth rate since last year, while the second round of reports focused on the fact that it was mostly discounters that saw gains and that shopping at malls declined 0.5% from last years levels. Also, the existing home sales number disappointed slightly and inventories of unsold homes are at an 18-year high.
Our position for some time has been that we're fundamental USD bears without the technical justification for being so - and this latest move higher could be another dramatic "tease" within the 1.1650 - 1.1900 range, or it could finally be the beginning of a large reversal sequence that takes us rapidly to 1.2500, which is our preferred scenario (even as we keep getting whipsawed in the range). Our problem has been discerning whether we'd first see a capitulation to 1.1500 in EUR/USD before a rally was launched. As it stands now - we're forced to admit that a rangebound market is still a risk as long as we don't see the close above 1.1900.
The data from Japan overnight was mixed. The dramatic uptick in the Jobless rate may apparently been caused by "statistically dead" people reappearing in the workforce as they seek jobs for the first time in a long time - so one could actually see this as a sign of hope rather than worry. Also, the uptick in household spending is encouraging, as was the improvement in small business confidence. The USD/JPY trend will like slow from here if not reverse soon. EUR/JPY, on the other hand, looks ready to challenge the big 141.60 top after the overnight action.
Watch out for the US figures today. The durable goods figure is a volatile one, and not terribly reliable for anything. The Consumer Confidence number will definitely improve from last month - how much is the question. The market expects a sharp 5-point increase from last month's two year low of 85. By comparison - the November Michigan confidence improved 7 points. It may not matter, because a strong improvement is priced into the market - so a disappointment is the "surprise side".
Note: the support/resistance levels used in the matrix’s of this document are levels derived from yesterday high, low and close. Reference in the text to other support/resistance levels will occur.
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