Rise Of The Sleeping Giant

THESE TWO THINGS - Really delighted to see signs of a return to more volatile trade. I won't get too excited just yet, but there is definitely a taste of the FX markets of old. Two key developments from my end are 1) the movement in the market without the need for any real fundamental catalyst, and 2) that I find myself once again looking at and discussing EUR/USD price action. EUR/USD is the most liquid market out there, and the fact that it has been so quiet for so long is a testament to the uncomfortably stagnant price action in recent months. But now we are finally seeing some movement and it is creating great opportunity to trade. I would attribute this shakeup to the capitulation we have been seeing in US equities, and I have said for some time that it would take a correction in stocks to get things going. Ultimately, this has everything to do with Fed policy and a market that is finally pricing in the Fed's path to tightening.

AVERAGE TRUE RANGE - One of the key indicators I watch on a daily basis is Average True Range ("ATR"). This indicator tells you what the average range for a particular security is based on the time frame you are analyzing. The daily ATR in EUR/USD was already at historic lows heading into 2014, and has continued to collapse to present day. We are used to daily ranges in the Euro of about 100 points, and this year, that daily ATR has dwindled to 40 pips of range per day. This ATR is frightening for a market of this size, and should be a reflection of just how manipulated markets have been due to coordinated global accommodative central bank policy. Over the past few days we have seen a tiny uptick in the daily ATR, and given the timing, with the markets starting to prepare for the Fed shift, this could be a tiny development that quickly snowballs into something much bigger.

Remember when the $EURUSD daily ATR was 100? Via @joelkruger

WHO CARES ABOUT DIRECTION - In the end, as a trader, the direction really doesn't matter. As traders, we can only ask for volatility, and although there is plenty more that we should expect, I will certainly take what I can get. I guess one of the good things about going through a period like the one we have seen over the past several months is that if you can survive in these market conditions, you should be able to survive anywhere. Directionally, I remain a EUR/USD bear over the medium-term, but in the short-term (coming sessions), I have been warning of the need for a bounce. In Wednesday's analysis I talked about a potential double bottom on the daily chart and said that even if we saw a convincing break below the previous low at 1.3365, so long as we closed around this level, the double bottom possibility would still be in play.

LONG AND SHORT OF IT - The neckline for this formation comes in at 1.3445, and conservatively, if this level is taken out, this should open a measured move objective at 1.3525. I have said I like the idea of selling a rally into the 1.3500-1.3550 area, so this could offer a nice initial long, with a stop and reverse strategy around 1.3525. Wednesday's bullish hammer close certainly sets the stage for a push back over 1.3400 and towards the neckline. Throw in some daily studies that are now unwinding from oversold, and the case for the bounce is highly compelling. Back under 1.3330 would negate, but only delay the inevitable corrective bounce. As for the rest of the currency market, the USD could come under some broad pressure, but I suspect we will see other currencies underperform any Euro strength.

SLIGHTLY MORE EXOTIC - The riskier the currency, the less upside I believe we will see against the Buck. But overall, be prepared for some sessions of widespread USD selling, and then be prepared to buy the USD into those dips. The anticipated currency strength includes the Yen, which has found renewed bids against the Dollar, after USD/JPY stalled out above 103.00. But USD/JPY is a different animal, and with this major pair still locked within the very familiar multi-month range, it is difficult to assert any strong short-term directional bias. Finally, I was pleased to see the relative weakness in the Shekel on Wednesday, but we will need to see another good push to really get other players excited with a potential ILS top (USD/ILS bottom). I am already long USD/ILS, but given my short-term analysis above, any of you exotic players out there may want to take a look at the EUR/ILS chart. This could also be a very attractive and compelling long trade.

Currencies could bounce over coming sessions, but risk FX rallies should be milder than major FX. Via @joelkruger


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