The Case for LONG Franc

02 Feb 2016 09:19 GMT · Time Estimate: 3 minutes ·
  • USDJPY stalls ahead of Sell level
  • AUDNZD faces risk over next 24 hours
  • EURCHF looking stretched
  • SNB not out of the woods just yet

ALMOST BUT NOT QUITE - USDJPY never quite got up to that desired entry for the short trade, with the market stalling ahead of 122.00 on Monday. I still like the idea of selling up around 122.00 but we may have to wait a little longer for that to play out and I will need to reassess when the market gets up there. As per Monday's commentary, there is a wonderful technical confluence of resistance around 122.00 which includes internal range resistance going back to the March 2015 peak, a 78.6% fib retrace off the November - January move and the Ichimoku cloud top. But for now, it's back to wait and see. I have learned to enjoy my time on the sidelines over the years. There is enough time to be trading, that when we get these periods of sitting back, we need to enjoy them and recharge.

DIVERGING OUTLOOKS - Of course, I'm not entirely on the sidelines. I am still holding my long AUDNZD exposure from 1.0660. But with the position well in the money at the moment, there isn't too much to be thinking about, especially given the fact that I am holding longer-term and looking for a push well above 1.2000 in the months ahead. Though AUDNZD has pulled back a bit into Tuesday, I think it will be well supported in favor of the next push beyond 1.1000, with the RBA coming out not as dovish as many may have thought. When you look at the RBA versus the RBNZ right now, it's clear the RBNZ is sitting on a more accommodative bias, which should favor Aussie yield differentials going forward. This trade could move a lot over the next 24 hours with the GDT auction, Kiwi employment and an RBNZ Wheeler speech due.

OVEREXTENDED - The only other market out there at the moment that is grabbing my attention, and that could develop into something is EURCHF. After several months of quiet consolidation, EURCHF has finally broken to the upside....this despite all of the risk liquidation in early 2016. Traditionally, the Franc has been a home for safe haven bids, but its role has changed over the past 12 months, with the SNB committed to intervention, while also adopting negative interest rate policy. All of this has acted as a strong disincentive to be buy Francs, even in risk off trade. Technically however, we are now getting some overbought readings on the daily chart, and this could warn of a pullback ahead.

Things could still get uncomfortable for the SNB going forward. Via @joelkruger

WHAT IF? - And back to the fundamentals, what happens if the ECB does in fact move forward with additional accommodation in March? We have already seen a warning of this in January, and we are seeing widespread accommodative gestures from central banks around the globe. If this continues, the SNB's negative rates won't look as unattractive and could once again invite Franc demand, especially if global equities falter again. Remember, the BOJ has also moved into negative rates this past week. So if this wave of accommodation continues, and if stocks start to come back under pressure, there just might be a great opportunity to sell into another EURCHF surge through 1.1200. Stay tuned.

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