Weekly FX Forecast- January 16, 2012

By: Christopher Lewis

EUR/USD

EUR/USD has certainly been interesting lately. The volatility continues in this pair as it is the epicenter of all things dramatic and Forex related. The pair attempted a rally during the week, but was quickly turned around. The resulting candle for the week was a shooting star, and this is formed at the bottom of a fall – never a good sign for the bulls. The area highlighted on the weekly chart by yellow shows that the 1.26 level is supportive, but the fact that we failed to rally gives this pair the look of sitting right on the precipice. A late Friday downgrade of several European nations by S&P isn’t in this chart – it was done after 4 pm New York time, although there were plenty of rumors on Friday during the session. If this pair breaks down below the 1.26 level, the blue box on the chart shows just where the next serious support is – roughly 1.20 or so.

EUR/CHF

EUR/CHF has a bearish week over the last 5 sessions, and fell almost the entirety of those days. The biggest issue with the pair is the fact that the Swiss National Bank has a “minimum acceptable rate” of 1.20 that they are willing to deal with in this pair. The market shot up right away when that was announced, and we have yet to see that area retested since. However, with the growing concerns in Europe, there is a real shot at this happening.

The 1.20 level simply must be defended, and even though the Chairman of the SNB resigned amidst scandal this previous week, there is absolutely no way the SNB changes this policy. (It has stated as such several times.) However, the market looks like it wants to test this area, and I feel that buying at the 1.20 level could be one of the most obvious trades out there. The SNB will lose all credibility in the marketplace if it doesn’t protect this area, and the market would sink this pair to new lows in short order if they didn’t step up to the plate at 1.20 or so. Because of this, the EUR/CHF could actually be one of the most interesting ones out there at the moment.

USD/CHF

The USD/CHF pair formed a hammer for the week just above the 0.95 level. The pair has a lot of fundamental reasons for rising over time, but the move is going to be choppy. It will best be described as a grind and not a straight shot. However, the pair could be helped if the Swiss intervene in the EUR/CHF pair, as the markets will move in concert. With that in mind, we have a real shot at a sudden gain, but overall, this pair will grind as it normally does.

The Swiss have the added pressure of sending over 80% of their exports to the EU. Because of their best customer going broke and into recession, it is likely the Swiss economy will suffer as well. The US is actually expanding in general, and is also the safety trade. Because of this, the continued move towards the US dollar should occur, although the yellow box on the chart clearly shows we are fighting a resistive cluster at the moment. This pair should be profitable, and I have been buying on dips, but only the patient should be long at the moment. Selling isn’t even a thought at this time.

GBP/USD

This pair could be the “next big thing” in the markets. The entire world is short Euros, but far fewer are shorting the currencies that are severely impacted by EU issues. The UK sends over 40% of its exports to Europe and with the EU falling into recession – this doesn’t bode well for the United Kingdom’s economy. On top of that, the UK is currently stunted growth-wise as austerity takes a significant bite out of the economy.

The chart shows a massive complex head and shoulders, and we even broke below the neckline of 1.53 on Friday, although it did hold in the end. However, the market looks like it is only a matter of time before this pair gives way to the downside as the moves continue to push lower. The breaking of the neckline on a daily or higher chart would signal a move down to 1.40 or so based upon the “height” of the pattern.

USD/CAD

In the category of “almost as exciting as watching paint dry”, the USD/CAD has been getting into a tighter and tighter ranges. The 1.02 area seems to be a bit of a fulcrum in this pair, but the most important thing is that we are seeing a wedge form.

The pattern and tight trading makes sense as the two economies are so intertwined. Also, the oil markets have been going back and forth in a tight range as well, and while there is only limited demand for crude at the moment, there is also the drama with the Iranians in the Gulf at the same time. It is a confusing time to be an oil trader I am sure.

With this in mind, I am waiting to see the triangle/wedge pattern that has formed in order to pick a direction. To be honest, I actually prefer the upside as the Dollar is an easy safety trade, and the oil markets are far too heated at the moment for the reality of the energy picture. None the less though, all I can do it wait to let the market let me know which direction it wants to go by a breakout of the pattern.