2010 FX Review

The Japanese Yen was the star performer of 2010 among major currencies with the Swiss Franc and the Australian Dollar trailing just behind. The North American currencies (US & Canadian Dollar) were in the middle of the pack, while the British Pound and the euro were the two clear losers.

.

Japan's currency was up nearly 14% in 2010 against a trade-weighted basket. The dramatic fall in global interest rates allowed yield differentials among major economies to shrink vs. Japan. The reduced negative carry associated with the yen along with its safe-haven status, allowed the currency index to reach all-time highs. By the end of October, the USD/JPY was threatening the psychological 80Y level before the Ministry of Finance stepped in, intervening in the fx markets for the first time since 2003. The latest bout of strength is once again threatening the lifetime highs, leading to more speculation of intervention heading into the new year.

.

The euro was the worst performer of 2010, losing more than 7% vs. a trade-weighted basket of currencies. Early in 2010, fears of a sovereign debt crisis developed, concerning various European Union members. This caused bond yield spreads from Portugal, Italy, Ireland, Greece and Spain to widen out dramatically vs. the German Bund. The crisis of confidence of rising debt levels and government deficits climaxed in May, causing the ECB and IMF to step-in. The comprehensive trillion-dollar rescue package managed to calm nerves, allowing the single currency to bottom-out in June. However, recent headlines out of Ireland have put additional pressure on the euro, triggering fresh all-time lows vs. the Australian Dollar and Swiss Franc. The headline risk associated with the EU highlights the ongoing challenges for the currency going into 2011.

.

For 2011 posts, please visit http://fxtrends2011.blogspot.com/

CHART OF THE DAY

Daily DXY Roundup - 12/30

The US Dollar Index (DXY) finished modestly lower after paring losses on the back of firmer economic data. Price-action dipped below recent platform support at 79.58 before bullish diverging intra-day studies triggered a corrective recovery. The region between the December 14th swing low and the key 38.2% retracement (78.82/79.22) is the next downside target for dollar bears. Meanwhile, only a move above trendline resistance near 80.10 will shift focus back towards the resistant 130-day moving average.

The British Pound was the broad loser on the day following weak UK housing data. The Sterling exchange-rate index fell to a fresh 2-month low as the GBP/USD retreated back towards the lower end of its recent range and the GBP/CHF reached a new lifetime low. Oversold daily studies and thin trading conditions should allow for temporary consolidation as the immediate focus shifts to more UK housing data on Friday.

The Swiss Franc continues to be an outperformer, benefiting from its safe-haven status. The trade-weighted index finished up 0.66% following fresh all-time highs vs. the euro, dollar and pound. Further upside, however, should be hampered by thin holiday trade and oversold daily studies.

The USD/JPY managed to find a foothold at 81.36, the 76.4% retracement of the 80.23/84.51 advance on the back of bullish diverging hourly studies. Oversold daily conditions also contributed to the pairs bounce, forming a daily spinning top base. Dollar bulls will now need to reclaim the former swing low at 82.34 to avoid a re-test of November’s cyclical low at 80.23.

CHART OF THE DAY

Daily DXY Roundup - 12/29

The US Dollar Index (DXY) continues to struggle to clear the 130-day moving average, losing nearly one percent after rejecting near this key resistance overnight. As a result, dollar bears were redirected towards newly formed platform support at 79.58, leaving a downside breach of daily (9-period) RSI trendline support. Further weakness will expose 78.82/79.22, between the December 14th swing low and the key 38.2% retracement. Overcoming downward sloping trendline resistance near 80.20 is now necessary to regain the medium-term bullish tone.

The Japanese Yen was the broad winner on the day, increasing 0.70% vs. a trade-weighted basket of currencies. The GBP/JPY marked a fresh 2-year low, but managed to recover following a weak test of Tuesday's fresh low. The USD/JPY failed to regain the 50-day moving average and saw follow-through selling pressure following a bid in the treasury market. Oversold daily studies and possible bullish hourly diverging studies hint of possible consolidation going into thin end-of-year trade. Meanwhile, the yen exchange-rated index (Bloomberg: CEERJN:IND) continues to ascend towards the late October all-time high.

The AUD/USD re-tested the November peak, marking a fresh year-to-date high. Due to the recent outperformance, the Aussie now looks overvalued at current levels according to daily overbought readings vs. a variety of currencies. The Australian currency, however, is expected to outperform in the new year given robust risk appetite in global equity markets and should be accumulated on any oversold dips.

CHART OF THE DAY

Daily DXY Roundup - 12/28

The US Dollar Index (DXY) managed to recover earlier losses in overall thin trading conditions. Bullish hourly diverging studies (MACD & RSI) triggered a rebound just above the December 17th low in the mid-79 region. Not only does this potentially mark platform support, but it also represents a failure to break daily (9-period) RSI trendline support. A daily close above the resistant 130-day moving average at 80.48 is now required to confirm an upside break-out towards the 200-day moving average. Meanwhile, only a daily close below the 30-day exponential moving average will shift focus back to the Fibonacci retracement at 79.223.

The EUR/USD was the underperformer on the day after rejecting at the 25-day exponential moving average. Bearish hourly diverging studies also triggered a failure to clear the daily (9-period) downward sloping trendline. Moreover, price-action has confirmed a bearish daily spinning top formation that now refocuses euro bears back to the key 1.3080 region. A break below this important 50% retracement level would then suggest a re-test of the 1.2970 swing low. In the meantime, only above RSI trendline resistance and the 25-day exponential moving average (now at 1.3264) will shift expectations higher.

The Swiss Franc continues to be an outperformer, trading up nearly a percent against a trade-weighted basket of currencies. The Swiss currency reached fresh all-time highs vs. the US Dollar and British Pound, while continuing to hover above last week’s all-time high vs. the euro. Further upside, however, could be hampered by thin holiday trade and possible daily bearish diverging studies. As such, overbought hourly technical indications seem to be a more appropriate strategy to short the EUR/CHF, GBP/CHF and USD/CHF.

The British Pound finished the day relatively unchanged. In addition to marking a fresh all-time low vs. the Swiss Franc, a new cycle low was reached vs. the Australian Dollar. The GBP/USD failed to clear the 1.5484 former swing low, triggering a sharp relapse to last week’s swing low near 1.5350. Possible daily bullish diverging studies and the persistent probe of the 200-day moving average suggest that the Cable could consolidate until the bulk of traders return to the market next week.

The USD/JPY broke below the 50-day moving average and 50% retracement level at 82.45 following strong Japanese economic data and renewed selling pressure in Asian equity markets. The pair found support, however, near the 61.8% retracement at 81.86 to form a daily bullish hammer. Dollar bulls will now look to reclaim the formerly supportive 50-day moving average at 82.70 to avoid a re-test of the Fibonacci pivot at 81.86.