Bonds Force Another Reversal, Upside May Be Limited

Last week’s soft Non Farm Payroll number coming in lower than expected at 169k vs 178k forecast with a revision lower for the previous NFP, which also came in lower than forecast may have shaken the markets more than initially expected and it seems that bond traders, who led the way in pricing in the Fed’s taper by starting to sell-off 10 year T-Notes as early as May this year, have backtracked slightly from Friday’s yearly low (yearly high in rates at just above 3%). As of writing the 10 Year was fairly bid into the Asian session following an auction today which saw high demand considering the FOMC is widely expected to begin implementing a reduction of bond purchases next week, so bonds are meant to be tanking right now. This suggests that we are observing a correction higher in bond prices following the relentless selling that has occurred this summer, perhaps based on the fact that the data which Bernanke has continually mentioned as critical for the taper decision has been softer on the last two occasion, yet bonds have been priced as if the data had continued to be as impressive as earlier in the year.

Whatever the reason for the bond demand, the implications for the FX space have already been seen, with what seemed like a reasonably stable down-trend for the European currencies and an up-trend for the US dollar has now broken out in the other direction. Quite how far this reversal can go remains to be seen but if bond buying gathers momentum we may see lower levels again for the USD% index before things are clarified next week. If the Fed announce a lower than expected reduction or that they expand their forward guidance significantly to counteract the market effect of a reduction in asset purchases, this may also weigh on the Dollar. The most likely outcome though is that the dollar drops in the short term and crunches through a good number of EUR/USD shorts and USD/CHF longs before running out of steam and dropping again during the FOMC announcement.

US 10 Year T-Note

USD% Index

With Index RSI at 24 the USD% index is most definitely oversold currently, however it continues to push through support for the time being, Currently with good momentum to the downside, a stabilisation of the index should be observed before fresh dollar longs are added, although brave traders with large stops may find these levels appealing.
I maintain my bullish USD% outlook following some stop hunting until the FOMC

USD% Index Resistance (EUR/USD support): EUR/USD 1.3300, 1.3267, 1.3233
USD% Index Support (EUR/USD support): EUR/USD 1.3350, 1.3367,1.3400

EUR% Index

The strong resistance from a confluence of Fib retracement and Fib expansion levels finally broke today , exposing 1.3300 in EUR/USD, which also gave way slightly. The extremities of the USD% index RSI may mean a slight retracement tomorrow for this bullish move, however further upside in the short turn seems likely until a return to bearish trend next week.

I remain bearish EUR% in the medium term but expect to see higher first

EUR% Index Resistance: EUR/USD 1.3350, 1.3400
EUR% Index Support: EUR/USD 1.3300, 1.3280, 1.3250

EUR/USD Trade Positioning

My short EUR/USD from 1.3232 hit stops for a loss

JPY% Index

With last weeks gap still unfilled and the dollar and the Nikkei heading lower we may see USDJPY 99.00 to fill the gap before a return to bearish trend now that the risk-off buying as a result of the Syrian crisis seems to have diminished.

I remain bearish JPY% although expect further strength in the short term

JPY% Index Resistance (USDJPY Support): USDJPY 0.9966, 09900, 0.9866
JPY% Index Support (USDJPY Resistance): USDJPY 100.50, 100.84, 101.00

USD/JPY Trade Positioning

I am long from 97.21 and I’ve added to this from 98.00 and 100 with stops set to break-even for the basket of trades
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GBP% Index

UK claimant count impressed today at -32.6K vs -21.2k forecast, which gave the pound a stong boost though resistance. This was initially faded before further demand saw the index finish the day near highs. Price action seems to be accelerating currently and approaching overbought levels at the top end of the bullish channel. Much like the other European currencies, it seems likely that we will see a correctional turn around soon given how one directional trade has been lately, but for now we will likely go higher. Trend is still bullish until the bullish channel has failed

GBP% Index Resistance: GBPUSD 1.5866, 1.5920
GBP% Index Support: GBPUSD 1.5770, 1.5700, 1.5600

AUD% Index

The AUD% index pushed higher today ahead of tonight’s RBA data release. Poor unemployment data could see the bearish sentiment return to keep the index in a wide consolidation pattern. Should this be the case, shorts from these prices would be favourable.
I am bearish AUD%

AUD% Index Resistance: AUDUSD 0.9375
AUD% Index Support: AUDUSD 0.9333, 0.9296, 0.9200

AUD/USD Trade Positioning

I am long AUD/USD from 0.91348 with stops set to break-even however I have taken some profit at 0.9325 for 177 pips profit

CHF% index

Much like the EUR% index chart, the CHF% has pushed through resistance and now looks set to push higher. USDCHF 0.9277 must be defeated before a further run higher can occur. With the EUR% index outpacing the CHF% index higher, this may be a struggle and runs the risk of running out of steam before it gets going.

I am bearish CHF% in the medium term although a expect to see a further attempt higher

CHF% Index Resistance (USDCHF support): USDCHF 0.9277, 0.9200
CHF% Index Support (USDCHF resistance): USDCHF 0.9333, 0.9350