Switzerland to Charge Forward with Currency Intervention

The Swiss National Bank has been intervening in the currency market since March. Unlike other central banks who have failed at intervention, the SNB has done a fantastic job keeping EUR/CHF above 1.50 for the past 3 months. The SNB focuses on EUR/CHF over USD/CHF because the European Union is by far the country’s largest trading partner. The Swiss National Bank has a monetary policy decision on Thursday and interest rates are expected to remain at 0.25 percent. If they could, Switzerland would probably cut interest rates. The State Secretariat for Economic Affairs just released their latest economic forecasts. GDP growth is expected to contract by 2.7 percent this year compared to a prior forecast of -2.2 percent. The economy is also now expected to shrink instead of grow in 2010. Therefore the SNB will not be abandoning their loose monetary policies anytime soon.

However for currency traders, the more important takeaway from the meeting will be the Swiss National Bank’s reluctance to rescind its commitment to currency intervention. If that is the case, then current levels may present a buying opportunity for range traders as the SNB is likely to actively maintain this incredibly yawn inducing range in EUR/CHF.

Meanwhile the EUR/JPY trade that I posted earlier this week has hit its target of the first standard deviation Bollinger Band. The 50-day SMA now at 132.30 will provide some support but if that level is broken, we could see a move down to 130.

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Japanese Retail FX Positioning

We all know that Japanese traders have been obsessed with the carry trade. However given the more than 30 percent decline in many of the Yen crosses last year, many people may be wondering how many Japanese carry traders are still in the game. Can these traders still remain committed to their long AUD/JPY and GBP/JPY positions given the big losses that they have already taken?

My good friend Rhonda Staskow has compiled some great charts illustrating the changes in long yen positions at Tokyo Financial Exchange (TFX) and Gaitame.com, two of the largest retail currency brokers in Japan. These charts run from May 28 2008 to Jan 6, 2009 and are presented as the percentage of longs in overall positions.

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Dollar Tanks as Jobless Claims Signal 75bp Rate Cut from Fed

The US dollar is tanking as jobless claims rise by the largest amount since November 1982, 26 years ago. As I have suspected, it is the 1980s all over again.

This confirms that the 533k drop in non-farm payrolls last month will not be the bottom in the labor market. When claims first hit 573k in January of 1982, non-farm payrolls dropped by -327k. It rebounded significantly the next month (-6k), but that was only precursor to another 10 consecutive months of job losses with non-farm payrolls revisiting the -300k levels in July (NFP in July 1982 was -343k). These jobless claims numbers reflect the massive layoffs that we have heard in the past weeks from companies like AT&T, Viacom and Sony. Continuing claims hit 4.429 million, the highest since 1982.

The widening of the trade deficit leads us to believe that GDP will take a big dive in the fourth quarter. The Treasury market is already pricing in the possibility of deflation and depression with yields in zero to negative territory for the first time since the Great Depression and incoming data supports that thesis.

The weekly jobless claims number will add pressure on the Federal Reserve to cut interest rates by 75bp next Tuesday. Fed Fund futures are already pricing in a 100 percent chance of a 75bp rate cut from the Federal Reserve next week. This would take US rates to 0.25%, making the US dollar the lowest yielding currency in the developed world.

If the Fed takes interest rates to zero, we could see USD/JPY fall to 13 years lows and the Euro to return to 1.35.

Even though volatility in the currency market has compressed since October and November, the Federal Reserve’s next interest rate decision is a major event risk because interest rates will be taken to historically low levels. Not only are the Fed expected to take interest rates to the lowest level this generation has ever seen but they have to figure out how to effectively signal their intentions of taking US interest rates to zero without completely spooking the markets. This will be a difficult balance to walk and one that could easily lead to an expansion in volatility in the currency market.
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Explosion in Forex Trading Ranges

Forex trading ranges have exploded over the past few months. The daily average trading range has doubled for all of the actively traded currency pairs in 2008, with some currency pairs even seeing a 200% rise in their average daily range.

However the big explosion in volatility has actually happened in the past 9 weeks. EUR/GBP, USD/CAD and the AUD/USD have seen the largest increases to their average daily range, but the range for the EUR/USD and GBP/USD has also increased materially.

More specifically, in 2007, the EUR/USD had an average daily range of 84 pips. Since October, its average daily range has been 267 pips, a more than 300 point rise.

Understanding trading ranges is very important because it plays a big role in developing effective money management strategies. I explore this concept in more detail in the second edition of Day Trading & Swing Trading the Currency Market.

EUR/GBP which use to known as one the range trading currency pairs saw its average daily trading range increase from 36 pips in 2007 to 142 pips since October, a whopping 400 percent rise. Say goodbye to the days of the hiding in low volatility of EUR/GBP because it is currency pair that has seen the largest expansion in volatility.

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Big Moves in the Currency Market

Most currency traders only have their eyes on the “majors” such as EUR/USD, USD/JPY, and the GBP/USD. Admittedly, these are the most liquid currency pairs, but sometimes opportunities could be missed if you are not also looking at the crosses. Trends are usually more powerful in the crosses than the majors and you may not have realized that some currency pairs hit multi-year lows today on an intraday basis:

GBP/JPY: fell to a 13 year low
NZD/JPY: fell to a 7 year low
CHF/JPY: fell to a 6 year low

On the upside:

EUR/GBP: hit a RECORD high
EUR/NZD: hit a RECORD high

Here are pairs that are closing in on significant levels

USD/JPY: 125 pips from 13 year lows (needs to break 90.92)
USD/CAD: 250 pips from 3 year highs (needs to break 1.3019)
NZD/USD: 130 pips from 5 year lows (needs to break 0.5193)
CAD/JPY: 110 pips from 8 year lows (needs to break 71.02)
GBP/CHF: 125 pips from 34 year lows (needs to break 1.7426)

Also on Monday, I indicated that the British pound was headed for 1.45. That target was reached this morning.

Here is the British pound chart:
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