Currencies Trading Strategy

EUR/USD. Rally Intact

EUR/USD (1.3263) is down slightly overnight, but after showing signs of stalling last week, the uptrend appears intact after Friday’s strong rally.

Technicals:

• Trend: Daily lower; Weekly higher.

• Overbought/Oversold (stochastics): Daily overbought; Weekly neutral.

• Support / Resistance Levels: Support for EUR/USD lies at 1.30 (psychological), 1.2733 (Jul 21 low), 1.2152 (Jun 29 low), 1.1877 (Jun7 low), 1.1827 (Mar’06 low), and 1.1640 (Nov’05 low). Resistance lies at 1.3334 (Aug 6 high), 1.3692 (Apr12 high), 1.3818 (Mar17 high), 1.4026 (Feb3 high), 1.4194 (Jan25 high), 1.4579 (Jan13 high) and 1.4626 (Nov low).

Positioning:

• The CFTC net long, non-commercial position rose to -13.6K last week, consistent with the ongoing rally in spot. The position is at the top of its six-month average, suggesting a potential top in price action.

• The risk reversal (3m, 25delta) rose overnight along with spot. The reversal is still heavily skewed for EUR downside, but it has rallied sharply towards the top of its six-month range – suggesting the rally is increasingly at risk of stalling or failing.

• Implied Vol (3m) rose overnight, but it remains in the bottom-third of its six-month range.

Cross-asset valuation: The significant correlations that EUR/USD has exhibited during the past 60 days are the US10yr yield (positive) and the SPX (positive).

GBP/USD. Stalling at 1.60 - still

Cable (1.5956) is up overnight, but it remains stalled at 1.60, where it has been stuck since early last week.

Technicals:

• Trend: Daily lower; Weekly higher.

• Overbought/Oversold (stochastics): Daily overbought; Weekly overbought.

• Support/Resistance Levels: Resistance lies at 1.5999 (Aug9 high), 1.6284 (Jan22 high), 1.6458 (Jan19 high), 1.6479 (61.8% retracement of Nov to Dec decline), 1.6722 (Dec 3 high), 1.6878 (Nov16 high) and 1.7043 (Aug high). Support lies at 1.50 (psychological), 1.4949 (Jun12 low), 1.4239 (May19 low) and 1.3503 (Jan’09 low).

Positioning:

• The CFTC net long, non-commercial position rose to -8.4K last week, consistent with the rise in spot. The net position is trending higher and lies near the top of the 6-month range, suggesting a potential top in price action.

• The risk reversal (3m, 25delta) rose overnight along with spot, and it remains near the high since Feb. While it remains skewed for GBP losses, it is also in the upper end of its six-month range, which suggests an overbought condition.

• Implied Vol (3mo) rose overnight but remains near the low since Sep 2008.

Cross-asset valuation: The significant correlates over the past two months for GBP/USD have been the DXY (negative) and EUR/USD (positive).

USD/CHF. Channeling a downtrend

USD/CHF (1.0399) is up overnight but continues to trade a modestly downtrending channel formation in place since early-Jul.

Technicals:

• Trend: daily lower; weekly lower.

• Overbought/Oversold (stochastics): Daily oversold; Weekly oversold.

• Support/Resistance levels: Resistance lies at 1.0641 (Jul27 high), 1.0676 (Jul12 high) and 1.1742 (Apr’09 high), while support lies at 1.0332 (Aug6 low) and 1.0131 (Jan low).

Positioning:

• The CFTC net long, non-commercial position rose to 15.1K, a new high since 2009. Such an extreme position suggests a potential bottom in USD/CHF.

• The risk reversal (3m, 25delta) fell overnight despite the rise in spot. This market segment has abandoned its bullish USD/CHF call, but the skew is extreme, suggesting potential for a rally in spot.

• Implied Vol (3mo) is up overnight, above multi-year lows.

Cross-asset valuation: USD/CHF has correlated mostly strongly during the past 60 days with EUR/USD (negative) and the USD index (positive).

USD/CAD. Rebound is testing downtrend

USD/CAD (1.0288) is up overnight, holding near the highs of Friday’s sharp, post employment rally. Price action is now testing the downtrend in place since early-Jul.

Technicals:

• Trend: Daily lower; weekly lower.

• Overbought/Oversold (stochastics): Daily oversold; weekly neutral.

• Support/Resistance Levels: Resistance lies at 1.0307 (Aug 9 high), 1.0584 (Jul16 high), 1.0677 (Jul5,6 high), 1.0680 (Jun high), 1.0853 (May25 high) and 1.1725 (Jul’09 high). Support lies at 1.0108 (Aug5 low), 0.9931 (Apr21 low), 0.9825 (May’08 low), 0.9712 (Feb’08 low), 0.9058 (Nov’07 low).

Positioning:

• The CFTC net long, non-commercial position rose to 33.3K last week. The move is from the bottom half of the six month range, and could suggest that spot will rebound from here.

• The risk reversal (3m, 25delta) rose overnight along with spot. It is trending lower deep into the bottom half of the six-month range, consistent with the move lower in spot but also warning of a potential reversal.

• Implied Vol (3m) rose slightly overnight and looks to be testing the downtrend in place since May.

Cross-asset valuation: In terms of other assets correlating with USD/CAD, watch the SPX (negative), CRB (negative), crude oil (negative), and the 2yr spread (negative).

USD/JPY. Pinned near lows

USD/JPY (85.57) is up overnight, rebounding slightly from the new low since Nov’09 established Fri. However, the downtrend continues. Further weakness is likely to provoke a policy response from Japanese officials, but the case for a rally is also weak.

Technicals:

• Trend: Daily lower; Weekly lower.

• Overbought/Oversold (stochastics): Daily oversold; Weekly oversold.

• Support/Resistance Levels: Support lies at 85.02 (Aug6 low) and 84.83 (Nov27 low). Resistance lies at 88.12 (Jul28), 89.16 (Jul12 high), 92.89 (Jun4 high) and 94.99 (May4,5 high).

Positioning:

• The risk reversal (3m, 25delta) remained relatively steady overnight. The skew is still in favor of USD/JPY downside, but lies in neutral territory relative to its range the past six months.

• Implied vol (3m): rose overnight but remains deep into the lower half of its 6-month range.

Cross-asset valuation: The correlations of USD/JPY with the US 10yr yield (positive) and the S&P500 (positive) are significant.

AUD/USD. Uptrend continues

AUD/USD (0.9188) inched higher overnight. It remains within the uptrend in place since early-Jun.

Technicals:

• Trend: Daily higher; Weekly higher.

• Overbought/Oversold (stochastics): Daily overbought; Weekly neutral.

• Support/Resistance: Technical support lies at 0.8634 (Jul19 low), 0.8316 (Jul1 low), 0.8067 (May25 low) and 0.7704 (Jul’09 low). Resistance for AUD/USD exists at 0.9222 (Aug6 high), 0.9389 (2010 high), 0.9406 (2009 high), and 0.9850 (2008 high).

Positioning:

• The CFTC net long, non-commercial position rose to 49.1K. It is trending up and lies in the middle of the six-month range, suggesting no impediment to further strength.

• The risk reversal (3m, 25delta) rose overnight. It continues to trend higher in the middle of its 6-month range.

• Implied Vol (3m) fell overnight and continues to trend lower below the middle of its range for 2010.

Cross-asset valuations: AUD/USD has correlated most strongly with equities (S&P500, positive), commodities (CRB, positive) and the DXY (negative.)

NZD/USD. Wedging against July high

NZD/USD (0.7299) is down overnight. It continues to trade higher lows, but the daily highs remain stalled below 0.74.

Technicals:

• Trend: Daily higher; Weekly higher.

• Overbought/Oversold (stochastics): Daily overbought; Weekly overbought.

• Support/Resistance: Resistance lies at 0.7397 (Jul27 high), 0.7442 (Jan14 high), 0.75247 (Nov high), and 0.7635 (Oct21 high). Support lies at 0.72 (psychological), 0.7030 (Jul19 low), 0.6795 (Jul1 low) and 0.6561 (May25 low).

Positioning:

• The CFTC net long, non-commercial position rose to 15.0K last week. It is now in the upper reaches of its six-month range, suggesting an elevated chance that the rally since Jun is over.

• The risk reversal (3m, 25delta) slipped overnight, but it is trending higher above the middle of its six-month range.

• Implied Vol (3m) fell overnight. It is stabilizing in the bottom third of its six-month range.

Cross-asset valuations: The strongest correlates for NZD/USD during the past two months have been AUD/USD (positive), stocks (S&P500, positive), the DXY (negative) and commodities (CRB index, positive).