To Capitalize on FX Moves, Do This

• September 8, 2004
• Dave Floyd

Despite equity and bond markets bouncing back after the summer
doldrums the FX markets remained largely a big yawn..seemingly still digesting
Friday’s large moves on the heels of the employment report.  Most players seem
to be looking at obscure crosses like AUD/NZD and AUD/CAD as the three big
commodity currencies are set to hear the path of monetary policy today (NZD, AUD
& CAD).

We have
mentioned this in past columns, and frankly it appears that not much has changed
in this respect, the FX markets are trying to find a trend, a theme, anything
that players can sink their teeth into.  With monetary policy clear, but not
absolute in terms of timing and intensity here in the US, it appears that the
transition from accommodative to restrictive will continue. These are the items
that seem important to us, but we cannot underestimate the frustration of many
FX players who simply are groping for correlations.   We can only hope that
Greenspan comments today as well as Beige Book and the trade deficit numbers on
Friday will help add more pieces to this complex puzzle.

Our short
in the EUR/USD remains around unchanged.  It is clear that Greenspan’s comments
will likely have an impact, most likely in our favor.  It seems likely the
Chairman will emphasize that previous data were in fact “soft spots”, rhetoric
to this degree should bolster the dollar and weaken the EUR.  Medium-term
traders still appears to be dollar bears versus the EUR, a sharp move back
towards Friday’s Monday’s lows will likely get them stirring.  Look for a break
of 1.2042 which should set the stage for a move towards 1.200 and 1.1970-1.1988
(all recent wave lows). 

Reliance on
short-term models is becoming the time frame of choice.  While it is tempting to
try to position for the “big move”, we need to be realistic that this is not the

time, nor place, at present.  Daily patterns and macro-overview still dominate
our

analysis, but we are relying far more on extended intra-day time frames to take
advantage of minor moves. 

Case in
point from yesterdays trading session.  We came into yesterday’s session
favoring longs in AUD/NZD (see yesterday’s

article) based on daily and weekly chart analysis as well as monetary policy
between the two countries.  However, short-term models were far more conducive
in terms of isolating entries and exits.

–        
look to 60, 120 and 240-minute charts

-        
use targeted levels for exits

–         
Fib extensions (1.0730)

–         
Rely on intra-day oscillators in the exit strategy as a way to gauge
waning momentum

With time,
longer-term theme plays will come back, in the meantime we must rely far more on
technical levels and short-term moves while the market adjusts to the transition
between monetary policies.

Technical Notes:

Dollar
Index:  a move through 89.72 and
90.07 is still needed to maintain upward bias

EUR/USD: 
1.1988, 1.2025, 1.2047

USD/CAD: 
look to sell rallies in this pair into 1.2917 ahead of rate decision at 9 AM EDT

CHF: 
Swissie continues to be the weakest of the bunch this AM.  Risk appetite appears
to be growing across most markets, so a soft CHF is to be expected.  SNB
Hildebrand to speak at 11 AM EDT, watch for further hawkish comments and
corresponding selling in USD/CHF

Please join me this Thursday at 1:30 PM
PDT for a FREE conference call regarding FX Trading.  To sign up please

click here. As always, feel free to send me your comments and
questions.

Dave