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Ding! ding! ding! - is that a bell I hear?



The Sydney time-zone, as a currency trading zone, has its pluses and minuses.  Usually it is a grind as overnight orders tend to sit on either side of a tight range and nothing really happens.  At other times, especially on Monday mornings after an eventful weekend overseas, because Sydney is the first major center (with apologies to our N.Z. friends) to open, it is extremely busy and the volumes can be huge.

The Sydney time-zone opens at around 4 pm N.Y.  This is so it can mop up the end of N.Y. trading activity and accept their orders for the Asian time-zone.  It is because it overlaps the N.Y. end of day that the Sydney time-zone can also be the marker for a turning point in the markets.  I have seen it on many occasions over the last 40 years or so.  Sydney acts as the "night watchman" for overseas central bank orders.  When these central banks come in they act more aggressively in their own time-zones and away we go.

I still have my imagination cap on this morning and this is what I see.  The world's major central banks put out a monster of a package over the weekend past.  And they waited for the market to digest it.  Monday was positive but on Tuesday the rampant cynicism which pervades the markets at the moment (rightly so) took hold and Monday's gains in the EURUSD were almost wiped out entirely.  The EURUSD was sold consistently throughout the day, terminating with the N.Y close of around 1.2620.  Now that is pretty close to 1.2600 which is only 100 points away from the 1.2500 panic sell off last Thursday.  It was that sell off, not just in currencies but in all asset markets, that spurred the strong actions of the weekend.

Now if I were a central bank, I would surmise that if the EURUSD were to break below 1.2500 that the subsequent selling would be too strong to stop much before say 1.2000.  And if I wanted to defend 1.2500 I wouldn't wait until it got there.  I would start buying at least at 1.2600.  So my line in the sand is 1.2600.  Fanciful?  Perhaps but it's worth a try because if they do hold it then the EURUSD is going to go up very quickly due to the market being so short.  If that happens then yes, ding!ding!ding! the bell rang this morning for the low in the EURO.

The main problem with this story is that the ECB is not the Bundesbank, and the Fed today is not the Fed under Volcker.  Anyway it will be interesting to see if we hold 1.2600 in our time-zone.  If so expect a big kick up overnight. 

The EURUSD chart shown above would suggest that if 1.2600 holds, that the move down from 1.3100 to 1.2600 was a failed fifth wave for a culmination of the fall from 1.5150 last November.  The subsequent rally will push up towards 1.6000 and beyond.

The AUDUSD is marking time, waiting to see what happens with the EURO.  Essentially, the budget handed down by the Australian Treasurer, Wayne Swan, was well received.  One cannot deny that Australia has got very attractive fiscal numbers at the moment.  In a world where people are focusing on public debt, with a budget deficit at 4.4% of GDP Australia is in a sweet spot right now.

The AUDUSD chart shows the resistance at .93/.9400.  This cleansing of long positions maybe what it needed to mount a successful campaign at that level.  I'm long AUDUSD now but will cut it if the EURUSD breaks below 1.2580.

The Detma model is mixed at the moment.  The price action has put it long USD against everything.  That's the deflationary risk off trade which is what has been happening over the last couple of weeks.  As I wrote above, if the central banks have stopped that then systematic models will wear a great deal of pain as they swing around the other way.

Frank


Disclosure: Long AUDUSD