Tuesday, July 5, 2011

Forex Trade of the Week

Forex Trade of the Week by Mario Sant Singh:
Markets to Focus on US Debt Ceiling For Now

5 July 2011

BUY EUR/CHF at 1.2247 SL:1.2177 TP1:1.2307 TP2:1.2367
The Greek story has received temporary closure after European finance ministers authorized a loan of EUR8.7 billion to be paid by 15th July. The IMF itself will also step in and honor its fifth installment of aid to Greece.

With the Greek saga out of the way, all eyes are now turned to the US. Traders are mindful of 2 things about US right now:

1. End of QE2

30 June 2011 signaled the official ending of QE2 by the Fed, although it still plans to reinvest principal payments on maturing securities for the next 12 months - to the tune of USD300 billion worth of Treasuries. This simply means that they won't entirely disappear from the markets, while keeping the level of stimulus in place. 

The conclusion is that the end of QE2 will drive up yields in the US. This also increases the likelihood of the Fed increasing interest rates, although in my opinion, it won't happen till the end of Q1 2012 at the earliest.

2. Debt Ceiling Reached

The debt ceiling of USD14.294 trillion has officially been reached and come 2 August, Congress faces a decision on whether to raise the ceiling. 

The debt ceiling is a cap set by Congress on the amount of debt the federal government can legally borrow. The cap applies to debt owed to the public (US bond-holders) plus debt owed to federal government trust funds (e.g. Social Security and Medicare).

Republican Senator John Cornyn of Texas said on Fox News yesterday that Republicans might accept a "mini" deal with the Obama administration on raising the debt limit. He mentioned that while Republicans would prefer a long-term settlement, they would accept a shorter-term agreement if that's all they could get done. 

No one knows for sure what would happen if the US fails to raise the debt ceiling by 2nd August. However, the chances of that happening are almost zero. Here's why:

Since March 1962, according to the Congressional Research Service, the debt ceiling has been raised an astonishing 74 times! Ten of those times have occurred since 2001.

The officials know the dire consequences of pushing the US Treasury into a technical default, and will not be taking any risk to shake the financial markets at such a critical juncture.

Top News This Week

Europe Minimum Bid Rate. Thursday, 7 July 2011, 7.45pm. I expect rates to be raised to 1.5% (current rate is 1.25%).

US Non-Farm Payroll. Friday, 8 July 2011, 8.30pm. I expect numbers to come in above 80,000 (previous number was 54,000).

Trade Call

BUY EUR/CHF at 1.2247 
Since hitting a historic low of 1.1803 on 24 June 2011, EUR/CHF has been on a nice uptrend. On the hourly chart, a level of conversion is detected at 1.2247. This is when resistance turns to support. A good long setup is spotted if prices bounce off the level of support and head upwards again. This is a trend play and we will go long when prices retrace to 1.2247. The stop loss is placed at 1.2177, a few pips below the last low. We will have 2 profit targets on this trade.
BUY EUR/CHF at 1.2247