My Favorite Setup: EUR/GBP

EUR/GBP has sold off quite aggressively this week and I think there is still downside opportunity for this currency pair!

On the euro front, the outcome of tomorrow’s ECB meeting is likely to be euro bearish. There is no question that rates will be left unchanged and ECB President Trichet will not consciously say anything to drive up the euro. Even though the slide in the euro has been aggressive, central banks usually become more concerned about a rising currency than a falling one. With inflation nonexistent, a weaker euro will help to offset the consequences of fiscal austerity measures being implemented across Europe. Avoiding any comments to support the euro is the minimum that I expect from the ECB tomorrow. Their priority right now is to stabilize the financial markets, provide funding for countries having difficult time raising money in the market and to prevent a further downturn in growth when fiscal austerity measures are implemented. Since investors are behaving as if the European debt crisis is growing more severe by the minute, the ECB may be forced to take the “nuclear option” of reinstating some of their long term funding facilities or worse, purchase Greek bonds.

On the pound front, I expect a relief rally after tomorrow’s elections. The Conservatives continue to lead and based upon the opinion polls, there will be no majority. So it is time to look beyond elections and over to the outlook for the U.K. economy and based upon the latest economic reports, the recovery is on track. In the month of March, construction sector PMI expanded by the fastest pace since September 2007. This of course follows the manufacturing PMI report which hit a 3 year high last month. If tomorrow’s service sector PMI report is strong as well, the Bank of England can officially draw a close to their Quantitative Easing program.

As a result, I think EUR/GBP will test both the support levels in the following chart:

My Favorite Trade Update: CAD Closing in on Parity

Sorry I haven’t blogged as much in recent days but I have been swamped with gearing up for my trip to Singapore later this month – I will be speaking at the ATIC expo, so come by if you are around.

First an update of My Favorite Trades. In mid March, I moved on from AUD/NZD to USD/CAD and EUR/GBP. At that time, I said I was looking for CAD to reach parity and for EUR/GBP to fall to at least 0.8915 (original post).

EUR/GBP has fallen beyond my target while the Canadian dollar is closing in on parity with the U.S. dollar. The main reason why the loonie has been so strong is oil, which rose above $85 a barrel today to a 17 month high. I think this baby will continue to rise and eventually reach my target of parity.

One of the questions that I was asked yesterday was, how long will the loonie remain at parity this time? When the CAD broke above parity in late 2007, it only remained there for about 2 weeks before fluctuating around parity for the next 7 months. I think that this time around, it will remain below parity for longer because Canadian officials have become more tolerant of the gains in the loonie. The economy is improving and Canadians are talking about raising interest rates. It has been a quiet data wise week in Canada but that will change next week when we the IVEY PMI and employment reports are due for release.

Meanwhile I really the Aussie and think that it can reach at least .9320 against the dollar ahead of the RBA rate decision on Tuesday.

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My Favorite Forex Trade: AUD/NZD

My favorite forex trade right now is shorting AUD/NZD.

After hitting a 9 year high of 1.3124 last week, the rally in AUD/NZD is losing steam. I should have posted about this earlier, but I think there is still room for the currency pair to fall.

Last week, the Reserve Bank of Australia raised interest rates by 25bp to 4 percent but hinted that from here on forward, they will begin to slow down their pace of tightening. Having already doled out 80 to 90 percent of their planned rate hikes, the focus will now turn to the RBNZ who has not even started to raise interest rates. Granted, the Australian economy is doing far better than the New Zealand economy, it is time for New Zealand to catch up. In January, New Zealand turned its first trade surplus after 7 months of consecutive deficits and in February, business confidence hit a 10 year high. Yes my friends, a TEN YEAR HIGH. With numbers as strong as these, the Reserve Bank of New Zealand will most likely grow more hawkish, paving the way for a rate hike later this year.

Furthermore, 25% of New Zealand’s exports go to China and 25% go to Australia. Therefore the combination of higher commodity prices and strong growth in NZ’s most important trade partners should encourage the RBNZ to adopt a more optimistic tone when they meet later this week.

Finally AUD/NZD presents a good risk reward opportunity from a technical basis. It is currently trading at 1.2975 and if it rallies back above 1.31, the uptrend has resumed. Otherwise, there is no major support in AUD/NZD until 1.2775

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My Favorite Forex Trade: GBP/AUD

My favorite long term forex trade is short GBP/AUD. From both a technical and fundamental basis, the currency should be headed lower.

Based upon the recent trend of economic data including the highest level of unemployment in 12 years and the sharpest decline in retail sales since Feb 2009, the Bank of England should keep monetary policy easy for as long as possible. According to comments this morning, they seem to agree. BoE officials said their decision to leave their Quantitative Easing program unchanged was a close one – in fact some members actually favored increasing the program. Of all the major central banks, the BoE is the only one still considering more rather than less monetary stimulus and for that reason, the GBP should be headed lower. In fact, I think that the GBP will probably be the worst performing currency this quarter.

In contrast, the Reserve Bank of Australia intends to raise interest rates again in the near future. Last night’s comments from RBA Governor Battelino could not be more hawkish. He said the mining boom that is currently underway could last beyond 2020 and the boom is expected to lift investment and terms of trade more than in the past. He also believes that the growth potential of China and India suggests that the demand boom will also last longer. Therefore monetary policy needs to be extremely disciplined at this time because every past mining boom has fueled inflation. As a result, the rise in the Australian dollar is important because it helps to contain inflation. In other words, not only will the RBA raise interest rates again but they also want the Aussie to rise.

On a technical basis, moving averages are in perfect order meaning that the 10-day SMA is below the 20 which is below the 50 and 100. This usually foreshadows a new and major trend in a currency. On a shorter term basis, the GBPUSD is also trading deep within the Sell Zone territory according to my Bollinger Bands – all of which points to further losses:

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