More Data Than Motion in EUR/USD (With a Move in NZD/USD)

EURUSD Daily 140814

Good Morning (EST), Friends. There was a fair amount of data released overnight, and therefore at least the possibility of some significant movement in currencies. On balance, the response was disappointing from a trading standpoint. While Eurozone GDP growth for the second quarter came in at flat, versus expectations of a 0.1% gain, and Germany’s GDP shrank by 0.2%  (-0.1% was expected), EUR/USD appeared unconcerned. The numbers themselves aren’t all that important, as the second quarter is already firmly in the rear view mirror. Still, with Eurozone consumer prices declining by 0.7% in July, the odds that Dr. Draghi and his European Central Bank colleagues will have to reach more deeply into their bag of monetary policy tricks seem to be growing.

The chart, however, suggests that either market participants were already looking for some form of additional easing from the ECB (very likely) or that they didn’t see this data as being anything worth responding to. For the moment, EUR/USD appears to be finding support around the 1.3335 area (the low has been 1.3332). There has been enough congestion there that it might just be worth putting a sell stop underneath, say at 1.3325 with a limit at 1.3320. This is by no means guaranteed to be a large winner, but the area just above has provided support for more than a week now. Some follow through selling on a break lower would be expected. Something around 1.3500 (you’ll recall that 1.3502 held as the low for what seemed like forever) strikes me as a very reasonable place to enter a short position, but of course, the price action first has to retrace that far. Waiting for appropriate entries in times of low volatility can be frustrating for people like me who are chronically short of patience. It is less annoying than is losing money, however, and while EUR/USD may not offer a lot to do at the moment, Todd and Doc show potential setups in equities, equity futures and their derivatives every trading day.

NZDUSD Daily 140814

Overnight, NZD/USD was a nice winner, as retail sales were reported to have risen by 1.2% in the second quarter, up from a 0.8% gain in the first. The push higher today doesn’t move it out of its current downtrend, but it does put it closer to a reasonable short entry around 0.8570. This could be the piece of news that turns the trend around, but that doesn’t seem likely at this point. I would expect the 0.8621 level to offer decent resistance if the pair does continue to move higher.  Another approach could be a long position in AUD/NZD, with an entry around 1.0865. A reference point for a stop would be not too remote at 1.0835.

AUDNZD Daily 140814

There are, of course, plenty of potential macro flash points, including most obviously the situation along the Russian-Ukrainian border. Currencies, however,  are trading at present in quiet and narrow ranges for the most part. It will probably take a surprise to create some large-scale movement, and the direction as well as the timing of those are notoriously difficult to predict. That, of course, is one major reason for our use of charts. They can’t predict, but they can help us plan appropriate responses to any headlines. That includes both entry levels on trades and, critically, risk management, since the key to long term success is remaining in the game in the short term.

My former colleagues report that institutional clients have been taking advantage of the low cost of carry to hedge their currency risk at unusually high levels. For example, cross-border equity managers with investments in European equities can sell Euros forward with virtually no funding costs. If in the past they generally hedged 50 per cent of their currency exposure, they might instead have 75% hedged at present. The strategists anticipate that hedge ratios will be reduced in the coming months, and this unwinding could, for example, provide EUR/USD with some lift. That’s because a hedge involves selling EUR forward; unwinding it involves a purchase. That may provide some better opportunities, but it will take time; as noted above, this is one of those periods when patience is required, and when expectations of potential returns need to be realistic.

As always, no matter what you’re trading, best of luck!