And yet, the pair has forged little progress to make that a reality. As they say, patience is a virtue. My trading approach is to combine rudimentary technicals and capital flow-based fundamentals; and both of these legs of analysis lead me to the same bullish conclusion for the foreseeable future: The first consideration is the pair incredible proximity to its record low.
Extending historical extremes is exceptionally difficult. So, we need a catalyst for reversal. Short-term, we have the threat of manipulation from the BoJ and Ministry of Finance to offer economic relief. Medium-term, we have the possibility of a deepening financial rut that makes us more selective of safe havens the dollar is undisputed for relative liquidity, credit market stability.
And, long-term, the return of higher global rates supports the Fed moving while the BoJ continues a two-decade, near-ZIRP policy regime. The question of timing the entry is my biggest hang up; but starting small and building up with confirmation is a good strategy for me. However, if we look beyond the next shock, we will likely find that a lot of the leverage will have been worked down and idle capital will need to be reinvested.
There will be a significant level of high-speculative investments; but the bulk of funds will be put behind lower risk investments — namely carry trade. Rates and rate differentials are already low; and they will be lower by the time underlying conditions turn around. A pair like AUDJPY will immediately have an advantage as its yield spread will likely be higher at the turn; but a lot of the capital appreciation that occurs in the exchange rate lies with the rate hikes and expectations of those hikes.
The above shows nearly 40 years of data in the USDJPY and the propensity for the pair to make its highs and lows for the year in the months of January and December. How might we look to trade this? With a long-term swing trade. The limits would be set as conditions dictate. Strong Evidence of Long Term Reversals. A reversal with quarterly data uses 12 periods 3 years for monthly 12, for weekly 13, and for daily Many decade long turns have been indicated by yearly or even quarterly key reversals.
The study also highlights the tendency for exchange rates to reverse during high volatility environments hint — USDJPY volatility is NOT high which decreases the probability that an important low is in place. A bullish reversal occurred in the 2 nd quarter of Bearish reversals occurred in the 4 th quarter of and the 3 rd quarter of Price fell another pips to the low after the reversal close to close was pips.
The most recent reversal occurred during the 3 rd quarter of A bullish reversal occurred in the 4 th quarter of Bearish reversals occurred in the 3 rd quarter of and the 3 rd quarter of The most recent large degree reversals paint a picture of USD strength in Unless your holding period is a year or more Ilya , I do not suggest treating these reversals as signals.
Rather, understand that conditions for the pairs examined are consistent with previous long term reversals. Broadly speaking, the Euro has been trending lower since July having peaked above 1.
More of the same seems almost certainly ahead. The Eurozone debt crisis remains unresolved, presenting a two-pronged problem. On one hand, it amplifies already considerable headwinds facing economic growth. Soaring borrowing costs amid fears of a default within the currency bloc stymie activity as individuals and businesses find it more expensive to spend and invest.
Meanwhile, growth in the US is expected to accelerate over the same period. This beckons aggressive monetary stimulus from the ECB, suggesting interest rate differentials will narrow firmly in favor of the US Dollar even if the Federal Reserve opts to make good on its promise to keep benchmark borrowing costs on hold through mid On the other hand, it threatens to unleash another market-wide selloff and global credit crunch, plunging worldwide finance into another existential crisis just three years after the debacle.
In the event of a default in a large country like Italy or Spain countless banks, funds and other institutions would be forced to book sharp losses. For some, taking such a hit will prove unbearable and they will be forced to go out of business, sending ripple effects across the markets as their creditors now face losses, and so forth.
Those that remain standing will rush to raise new capital, with banks and funds dumping assets at fire-sale prices to meet reserve and margin requirements. It goes without saying that such an outcome would outright crush private-sector economic activity on a global scale. Needless to say, such an outcome bodes very well for safe-haven currencies and in particular for the US Dollar, where official intervention does not undermine its store-of-value properties as is the case with the Japanese Yen and Swiss Franc, typically the other go-to safety vehicles in the FX space.
While on the surface, the recommendation appears to be non-currency specific, we view this as an extremely attractive opportunity for a portfolio hedge in and potential arbitrage strategy. Currencies have been broadly outperforming against the US Dollar in recent years and it finally appears as though this trend could be on the verge of some form of a reversal back in favor of the buck.
However, long USD positions have also been quite risky and exposure to the Greenback might bring with it some unwelcome stress. As such, our recommendation for non-US residents is to instead, put their money into US equities.
What does this mean? Here is how we see this playing out. So if this is the case, then where is the benefit in this trade, and why even do it? Well, what if we see a break down in familiar correlations where the US equity market rallies and the US Dollar also rallies at the same time? The global recession appears to be moving in phases, and with the markets now dealing with phase two of the crisis in Europe, we can start to anticipate the transition to phase three, where we believe that China, the commodity bloc economies and emerging markets will all be exposed.
At the same time, we see a first in and first out type of situation, with the US economy the first to emerge from the global recession which should translate into a more upbeat outlook on low valuation US equities and the US Dollar as well, on a narrowing of yield differentials back in favor of the Greenback as the Fed begins to signal a reversal of ultra accommodative monetary policy.
As European policy makers struggle to address the sovereign debt crisis, we expect the single currency to face additional headwinds in After actively trading the euro-pound throughout , the British Pound has recent strengthened against its European counterpart, and the sterling should continue to outpace the single currency in the following year as the U. As the euro-area faces an increased threat of a credit-rating downgrade, we expect the heightening risk for contagion to drag on the Euro, and the exchange rate should continue to push lower in the following year as the EU fails to restore investor confidence.
However, as the fundamental outlook for the U. As the European Central Bank and the Bank of England carry their easing cycle into , we expect to see additional monetary support in , but the preemptive approach taken by the BoE should help to increase the appeal of the sterling.
At the same time, with record-low rates in the U. We have all witnessed the extreme volatility and resulting shocks to markets the crisis in Europe has ignited over the past year. Considering the magnitude of the EU crisis, it comes as no surprise that an ominous cloud has gone relatively unnoticed under the radar: In addition to the China story, the Reserve Bank of Australia is also likely to aggressively cut rates in with Credit Suisse overnight swaps now factoring in more than basis points in interest rate cuts for the next twelve months, the highest expectations for cuts among the developed economies.
In spite of two rate cuts towards the tail end of , increased concerns over the debt crisis in Europe and expectations for further weakness in global trade will continue to put pressure on RBA Governor Glenn Stevens to soften monetary policy and maintain an accommodative environment for businesses.
A Fibonacci extension taken from the June and October highs reveal clear resistance at the Our bias will remain intact so long as this level is not compromised, with a breach above eyeing targets at 1. This level will remain paramount for the aussie with a break below risking substantial losses for the high yielder as it looks to test the lows at the 0. Christopher Vecchio, Junior Currency Analyst. While the Euro-zone faces a recession even if it is able to climb the wall of worry and convince market participants that none of its member countries will default on their debt, other European nations are facing stress.
The one of greatest interest, in my opinion, is Switzerland. To put the Swiss economy in perspective, one needs to look no further than how the Swiss Franc performed from the start of until early August. Recent data showed that Swiss growth in the third quarter had stumbled to a meager 0.
By September, Inflation was at a paltry 0. The combination of these downside pressures on the Swiss economy — slowing growth, slower inflation, capital flight to the Swiss Franc which damaged the export sector — forced the SNB to place a 1. Recent speculation suggests that the floor might be raised to 1.
The SNB will be forced to act, regardless of what is transpiring in the Euro-zone. Given the fundamental backdrop of Switzerland, it appears that the Franc will lose value over the course of In regards to the debt crisis itself, the European Central Bank may ultimately be forced to print money to help the periphery nations.
This has implications for the Franc. If the ECB chooses not to explicitly print money, the sovereign debt crisis is likely to get worse before it gets better, and investors will lose confidence in the future of the Euro-zone, and thus the Euro, fleeing to the Franc. Dollar did after the Federal Reserve decided to inject the financial system with more U. Major banks have suggested that the floor could rise as high as 1. Even in the most bullish of scenarios, the outlook for the Franc remains weak.
If the Euro-zone avoids a recession or collapse, the Swiss economy is primed to be dragged into a recession of its own, and the SNB will act accordingly. DailyFX provides forex news and technical analysis on the trends that influence the global currency markets. Click here to dismiss. Upcoming Events Economic Event. Forex Economic Calendar A:More...