Risk Reversal in the Forex Markets And Levels To Watch Next Week 19 November 2012

On Friday, we saw a news conference that various congressional leaders gave in the United States suggesting that perhaps there was some type of hope for a bipartisan agreement after all. The fiscal cliff discussions have been one of the most widely followed issues in the United States recently, and as a result a lot of “risk off” trading has been the norm. After all, this is a dysfunctional Congress that currently enjoys an 8% approval rating in the US, mainly because they simply cannot work together. With that in mind, very few Americans expect them to come to some type of true solution before the end of the year.

As a result, we saw reversals along most of the risk assets late in the day Friday. The New Zealand dollar and Australian dollar both formed hammers against the US dollar for the session, and of course show that there is a likely return to bullishness in the commodity markets as such. The British pound even formed a weekly hammer because of the Friday action, just above the 1.58 level. In other words, there are several currencies that presently look like they are about to make serious strides against the US dollar.

Commodity currencies

As mentioned above, the Australian and New Zealand dollars both look very tempting. I have to admit that out of the two, I prefer the New Zealand dollar as it is sitting on top of an obvious support zone in the form of the 0.81 handle. The fact that this hammer formed right there where we have been seen so much support lately suggests that we will see a bounce.

Whether or not this bounce last for any great length of time is completely up for debate. After all, there has been no true agreement made, and Congress can do many great things when it comes to putting a spanner in the works. In fact, there are really some minor members of Congress suggesting that they are not interested in working together. If that's the case, one would have to believe that there will sooner or later be some kind of stupid, and out of congressional member that send the market lower. However, in the short-term it looks like we are ready to bounce yet again.

Let's not forget the Euro

The EUR/USD also is showing signs of life just above the 1.27 support level. This also suggests that we will see Dollar weakness over the course of the next few sessions, as this market continues to grind back and forth between 1.27 and 1.28 or so. Over the longer-term, I still feel that the Euro is going to slide, but it may be a while. Certainly, people were willing to buy risk assets on any sign of good news, as the Friday rally showed. With that in mind, it looks like we will have a couple days of “honeymoon” trading as we continue to buy anything that can give some type of yield.

We should also pay attention to the EUR/JPY pair as well. After all, it did fall during the Friday session but got a bounce in order to form a hammer. We've had a strong couple of sessions, and a break above the 104 level would be absolutely bullish. In fact, if that happens there is a good chance that we will hit 110 before it's all said and done.  Of course, this pair will get absolutely crushed if some type of bad news comes out, most likely in the form of a lack of cooperation in the “fiscal cliff” talks in America. We already know that Europe is in recession, but quite frankly with the Bank of Japan getting ready to enter an ultra easy mode, the Yen should continue to weaken overall.

Speaking of Japan…

The opposition leader's in Japan have got their desired snap election in order to try and form another government.  It is already known that the opposition leaders have expressed their opinion that the Bank of Japan would be well served to print “unlimited Yen”, and the markets are trying to get ahead of that.  Quite frankly, it does look likely this will happen.

It should also be noted that the USD/JPY pair has broken out as well.  It appears that the Japanese yen overall is being assaulted ruthlessly, and should continue to be for the time being.  In fact, many of you probably don't remember five years ago when the easiest Forex trade was to simply sell the Yen.  It used to be that you would simply buy various currencies against the Yen, and would adjust your position or trade by the amount of “risk on” appetite that was in the market for that particular day.  For example, in a somewhat cautious day you would see traders run to the relative safety of the USD/JPY pair as it wouldn't fall quite as much as a more “risk on” type of situation as the NZD/JPY pair.

If you are patient enough, there more than likely will be some great long-term trading opportunities selling the Yen. There could be a little bit of volatility in that in time, however right now it does look like the market is gunning for the 84 handle against the US dollar, and perhaps even higher.

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