Trade Opportunities 2014

Top Trading Opportunities of 2014

Top Trades Opportunities of 2014 December 20, 2013 by the DailyFX Research Team [email protected] http://www.twitter.com/DailyFX

DailyFX, Research Arm of FXCM Inc.

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December 20, 2013

By the DailyFX Research Team

Simple risk trends loosened their grip on the FX markets this past year to be partly replaced by increased

speculation surrounding monetary policy – from expectations of more stimulus to pricing in a return of

rate hikes. Heading into 2014, the threat of volatility is building as risk exposure has flown beyond

traditional fundamentals and complacency in steady QE programs evaporates. Below are the DailyFX

Top Trading Opportunities of 2014.

John Kicklighter, Chief Currency Strategist

USDCHF | AUDNZD – Changing of the Monetary Policy Guard

David Rodriguez, Quantitative Strategist

USDJPY ‐ If it Ain't Broke, Why Fix It? Japanese Yen Remains My Top Trade

Jamie Saettele, CMT, Senior Technical Strategist

EURNZD | AUDNZD | USDCAD – Lots of Room in Historical Ranges

Kristian Kerr, Senior Currency Strategist

USDSGD ‐ Inching Towards a Minsky Moment?

Ilya Spivak, Currency Strategist

EURSEK | AUDNZD – Looking Past Risk Trends for Classic Yield‐Based Trades

Michael Boutros, Currency Strategist

GBPJPY | GBPCAD ‐ Breakouts Supported by Diverging Monetary Policy Outlooks in Focus

David Song, Currency Analyst

EURGBP | AUDNZD ‐ Sticking With Long‐Term Trends In 2013

Christopher Vecchio, Currency Analyst

GBPNZD – The Other Great Rotation


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John Kicklighter, Chief Currency Strategist

USDCHF | AUDNZD – Changing of the Monetary Policy Guard

There seems a remarkable relationship between the Swiss franc and Euro. The Eurozone is Switzerland’s

primary trade partner and international financial companion. This means whatever befalls the larger,

regional economy typically is mirrored by the smaller landlocked country – for better or worse. From a

currency perspective, this seems to support a remarkable correlation between the Euro and Swiss franc

against common counterparts. For example, the correlation between EURUSD and USDCHF is close to ‐

0.90 – meaning the two moved in the opposite directions most of the time and to the same severity.

This relationship, the outlook for monetary policy and the Swiss National Bank’s (SNB) commitment to

the 1.2000 EURCHF floor significantly boost the appeal and probabilities of a USDCHF long position.

Moving forward, if the franc continues to appreciate against its counterparts (as it has in the USDCHF

below), the spillover would inevitably draw EURCHF down and incur an SNB response. Otherwise,

looking at the traditional EURUSD (remember, assuming it maintains an inverse relationship to USDCHF);

the ECB is on the path for more stimulus and the Fed is talking about the Taper. That can offer a

synthetic boost to USDCHF. I will look for a long position with a first target of 1.3000 (momentum can

offer a much more profound ultimate objective) with a stop on a close below 1.1500.

USDCHF and EURCHF Daily


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Both a big‐picture fundamental and technical review of the AUDNZD suggest we are nearing serious

turning point. Since the exchange rate was floated nearly 30 years ago, the bulk of its price action has

fallen between a historical range of 1.3650 and 1.0500. While that may be half the range of the range of

the USDJPY or GBPUSD over the same period, it is nevertheless remarkable for its consistency and our

proximity to the ‘floor’ near the start of 2014.

There is a good reason why we have dropped so rapidly over the past few years to cover the entire

range: a severe disparity in monetary policy. Though much of the world was forced to cut rate over the

past five years, some move sooner and are further earlier in the upswing of the cycle. This is the case

between Australian and New Zealand. The RBA extended an easing regime (interest rate cuts) through

2013, while the RBNZ changed to outright threats of an expected 2.25 percent increase through 1Q

2016. That is incredible, but both of these are likely extremes. The RBA has little room to cut further and

will likely start to warn of hikes in 2014. Meanwhile, the RBNZ can’t threaten more severe movement

without inflation. As we retrace fundamental and technical extremes, I like a long position with a stop in

a higher time frame (weekly or monthly) close below 1.0500 as a stop.

AUDNZD Weekly Chart


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David Rodriguez, Quantitative Strategist

USDJPY ‐ If it Ain't Broke, Why Fix It? Japanese Yen Remains My Top Trade

The Japanese Yen was without question one of the best trades of the year, and indeed I had the fortune

to make it my focus from very early on. Why might it continue to make sense to sell the Japanese Yen?

Put simply: currency wars.

The Government of Japan and the central Bank of Japan (BoJ) show every intention to continue a weak

Japanese Yen policy, and they're in a unique position of having plenty of ammunition left in potential

easing.

For starters Japanese economic growth is still tepid at best, while domestic inflation remains controlled.

Public debt is likewise a major reason that the BoJ and the Japanese Government will keep its finger on

the 'trigger' of further easing. Extraordinarily large public debt mean that central bank bond buying will

be too difficult to resist. Politicians will keep pressure on the central bank to continue buying Japanese

Government Bonds.

So where are the trades? I like the US Dollar and British Pound versus the Yen. The case for the

Greenback is simple: the US Federal Reserve will need to start the so‐called "Taper" of its Quantitative

Easing policies in the New Year. The British Pound could see similar support as the Bank of England pulls

back policy easing.

The New Zealand Dollar could work as an anti‐yen trade as the Reserve Bank of New Zealand has made

it clear it will raise rates in the coming two years. Yet clear headwinds from falling commodity prices

limit its long‐term attractiveness, and we'll need to see a secular shift in commodity markets to put the

NZDJPY into play.

A Japanese Yen short position was one of the top trades in 2013, and I believe it will continue to be a

source of 'alpha' for the professional trading community in 2014.


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Jamie Saettele, CMT, Senior Technical Strategist

EURNZD | AUDNZD | USDCAD – Lots of Room in Historical Ranges

I can’t tell you what trades I am going to make in 2014 anymore than I can tell you the winning lottery

numbers. I can, however, share with you ideas that could become trades at some point in 2014.

EURNZD Weekly

1.4000

1.5000

1.6000

1.7000

1.8000

1.9000

2.0000

2.1000

2.2000

2.3000

2.4000

2.5000

2.6000

08/30/2008 10/03 05/08/2010 12/11 07/16/2011 02/18/2012 09/22 04/27/2013 11/30 07/05/2014 02/07/2015

0.000 1.49649

1.000 1.72738

2.000 1.95827

1

2

3

5

4

DIAGONAL FROM HERE

INVERSE HEAD AND SHOULDERSFXCM Marketscope © 2013

1.72738

1.95642

1.66196

Prepared by Jamie Saettele, CMT

Maybe EURNZD (NZD in general, see next chart) is a year behind EURAUD. A possible head and

shoulders bottom has been forming since February 2012. This pattern is longer in duration than the

EURAUD pattern that completed this year and therefore potentially more powerful. The pattern would

‘confirm’ above 1.7274. The measured objective would be 1.9583, which is also the 2011 high (1.9564).

From an Elliott perspective, the decline from that 2011 high is an ending diagonal. Ending diagonals are

characterized by 5 overlapping waves that typically form converging lines (hence ‘diagonal triangle’).

The reversal from the diagonal was confirmed on the break of the 2‐4 line in December 2012. The

objective is the origin of the pattern…at 1.9564.

http://www.dailyfx.com/forex/fundamental/article/special_report/2012/12/28/forex_top_trades_of_2013.html?CMP=SFS-70160000000NbTrAAK


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AUDNZD Monthly Close

Prepared by Jamie Saettele, CMT

AUDNZD is nearing the bottom of the range that has held since 1979. In general, 1.0500‐1.0700 is the

support zone. Interestingly, the measured objective from the latest range is 1.0736 (1.1197 – (1.1659 –

1.1197).

Lows (monthly closes) have appeared roughly every 105 months, or 8.75 years. The January 1988 low is

105 months from April 1979. The cycle translated to the left in 1995 and 2002 although another low

formed to the right of the cycle in 2005. For what it’s worth, the next cycle low date would be April

2014.

There is not even a possible setup at this point but if a bottoming pattern forms over the course of

several weeks or months in 2014, then we’ll at least be aware that it could be significant.


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USDCAD, USDNOK, and Crude Oil Weekly Closes

1.0000

1.1000

1.2000

1.3000

05/17/2008 06/06/2009 12/19 07/03/2010 01/15/2011 07/30 02/11/2012 08/25 03/09/2013 09/21

USD/CAD (W1)12/13/2013

0.000 0.96324

1.000 1.06569

2.000 1.16814 1.17225

1.05985

5.0000

6.0000

7.0000USD/NOK (W1)

12/13/2013

0.000 5.42805

1.000 6.16975

2.000 6.91145

6.72730

6.19397

50.00

100.00

150.00USOil (W1)12/13/2013 110

75

FXCM Marketscope © 2013

96.68

USDCAD and USDNOK are attempting bullish breakouts to multiyear highs. Measured objectives are

1.1680 and 6.91145. In the case of USDNOK, know that the 2010 high rests at 6.7273.

Many like to cite the most recent move in crude oil as the reason for their bullishness or bearishness in

USDCAD and/or USDNOK. I don’t care much for this type of analysis. If I’m trading USDCAD or USDNOK,

then I will look at USDCAD or USDNOK. For those that want a story though, then maybe crude is ‘it’. In

August, Black gold traded through its 2012 high by $2 and then declined nearly 20% in 3 months. Price

has bounced from the line that extends off of the 2012 and 2013 lows. Resistance is seen at 102‐104. A

break of the mentioned trendline would expose lows from November 2012 and October 2011 at 84 and

77.

http://www.dailyfx.com/forex/technical/elliott_wave/oil/2013/08/28/eliottWaves_oil.html?CMP=SFS-70160000000NbTrAAK


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Kristian Kerr, Senior Currency Strategist USDSGD – Inching Towards a Mynsky Moment?

"Economic history is a never‐ending series of episodes based on falsehoods and lies, not truths. It

represents the path to big money. The object is to recognize the trend whose premise is false, ride that

trend and step off before it is discredited." ~ George Soros

This time of year is usually filled with forecasts and predictions for the year ahead. Over my career I

have noticed that in order to do this most Wall Street economists and strategists just take the preceding

trend of the past year and extrapolate it forward another 365 days. It makes sense as it is the safe thing

to do. When they are wrong, it doesn’t seem so bad, since everybody else is as well. When right, they

look smart. This year so far is proving to be no different. After a 25% run up in US equity markets over

the past year strategists are tripping over themselves to slap targets some 15% + higher on the S&P 500

and Dow for 2014. We don’t think next year will be so easy and we expect a bit more two‐way action in

the indices – at a minimum. There are numerous reasons why the equity markets look a lot more

precarious now than this time last year. Margin debt and sentiment, for instance, recently reached

higher levels than those seen at the peaks in 2000 and 2007. This reeks of complacency. These,

however, are really just symptoms of the greater problem of policy and its overriding impact on the

stock market. What happens when the market begins to seriously question this influence ‐ or worse,

sees through it? Similar episodes in the last decade suggest it will not end well. We think 2014 might just

be the year that the investment world begins to question the not so invisible hands of our central

banking authorities. In such an environment, volatility should rise markedly with indices undergoing a

decline of at least 10% at some point during the year.


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From an FX perspective we like the Greenback generally in such an environment, but especially so

against Asian EM currencies given their geared link to the current global credit cycle. In the FXCM

universe of exchange rates, USD/SGD looks especially attractive even with the involvement of the

Singapore Monetary Authority.


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Ilya Spivak, Currency Strategist EURUSD – Looking Past “Taper” Speculation at Fed vs. ECB Policy Trends

The markets have been preoccupied with the timeline for the Federal Reserve’s “tapering” of its QE3

asset purchases since the central bank unexpectedly opted to keep the stimulus program at full size in

September. While this process is likely to continue feeding short‐term volatility, the overall picture is

less erratic. On balance, it seems fair to assume the Fed will look to scale back QE at some point in 2014.

In relative terms, that represents a hawkish shift along the monetary policy spectrum.

This stands in stark contrast with the trajectory of ECB monetary policy. Eurozone inflation has trended

lower for two years, prompting Mario Draghi and company to cut interest rates by 25bps in November

after year‐on‐year CPI slipped to 0.7 percent. This drove the Euro down at first but the single currency

quickly erased the drop. This makes sense: cutting the benchmark rate from 50 to 25 basis points means

little when the market rate for borrowing Euros (EONIA) has averaged around 8bps this year.

Investors’ inflation expectations priced into bond yields continued to fall after November’s rate cut.

Economists agree: a survey of forecasters polled by Bloomberg shows the outlook for 2014 CPI inflation

was marked down from 1.5 to 1.3 percent in mid‐November, after that month’s ECB meeting.

November’s PMI data showed region‐wide output prices across the industry spectrum fell for the 20th

consecutive month, suggesting calls for lower inflation are rooted in real‐economy developments.

All told, this means the ECB is likely to continue easing monetary policy in the year ahead. Non‐standard options like negative deposit rates, another round of LTROs or a direct‐lending program similar to the BOE’s FLS scheme are possible alternatives. Whichever form said easing takes however, the bottom line remains: the ECB stands to become more dovish while the Fed is positioned to move in the opposite direction, making for a bearish outlook on EUR/USD. I will look for technical confirmation of reversal as prices test channel resistance set from April 2008 to enter short, initially targeting 1.3148 (23.6% Fibonacci expansion level).


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Michael Boutros, Currency Strategist

GBPJPY | GBPCAD ‐ Breakouts Supported by Diverging Monetary Policy Outlooks in Focus

As we open up 2014 trade the single most important theme we’ll be watching for is divergences in the

monetary policy outlook for the world’s largest central banks. One of my trades of the year heading into

2013 was the long side of GBPJPY, a trade which was predicated by both the technical breach of a multi‐

year long consolidation formation and a stronger recovery in the UK economy. Although the sterling

struggled a bit early on against the greenback, versus the Japanese yen, the pound was by far the

strongest performer amongst the majors with an advance of more than 15.5% ahead of the close of

2013 trade. Arguably among the least dovish (dare I say “hawkish”) central banks, the BoE looks poised

to begin throttling back and possibly even move on rates in 2014 and will be a theme for these setups.

GBPJPY Weekly

As the BoE looks to begin ending the easing cycle, the BOJ remains committed to achieving its 2%

inflation target by 2015 and as such, our bias remains unchanged from last year’s forecast. We continue

favoring the long‐side of GBPJPY for short yen exposure while above 147.50.

The breakout of the multiyear consolidation formation seen last year is still in focus and although our

broader bias remains weighted to the topside, the pair looks vulnerable as we close out the year just


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below key resistance. Look for a pullback early next year to offer long entries with a breach above

immediate resistance at 168.12‐170.40 targeting objectives at 184‐188.27, 199.80 and 208.20. One of

the more compelling technical factors is also that fact that momentum has now broken into overbought

territory from sub‐30 for the first time since 1996 when the pair made fresh 6 year highs before

mounting the assault on the 15‐year highs subsequently made in 2007 (which are still in place). Risk for

a near‐term correction mounts with a break below the 161‐ handle with only a move sub 147.50‐148.50

invalidating our longer‐term outlook.

GBPCAD Weekly

Although not quite as compelling a case, from the fundamental side, the GBPCAD also looks poised for

further gains heading into 2014 with the pair still short of key resistance at 1.7895‐1.8167. Similar to the

GBPJPY (although lagging) the pair broke to the topside of a multi‐year consolidation formation this year

with a subsequent breach above key Fibonacci resistance at 1.6882/93 keeping our focus higher in the

near‐term. I’ll remain constructive above this level with only a break below the 1.6250‐1.6450 support

range invalidating our broader outlook.

Note that the momentum signature has continued to respect the 40‐threshold as support since the 2010

low, with this year‐‘s breach above the 70‐mark for the first time in 6‐years keeping our focus higher in

the medium‐to‐long term. Look for a break below the support‐ trigger to suggest a near‐term correction

with such a move offering favorable long entries lower down. A breach above 1.8167 targets objectives

at 1.9198‐1.9535 and ultimately 2.00‐2.0228.


14

David Song, Currency Analyst

EURGBP | AUDNZD ‐ Declines Remain Favorable for 2014

Keeping up with the 2013 forecast, the bearish trend for the EURGBP and the AUDNZD should continue

to take shape in 2014 amid the deviation in the policy outlook.

It looks as though it will be a race between the Bank of England (BoE) and the Reserve Bank of New

Zealand (RBNZ) as to who will be the first to start normalizing monetary policy, while the European

Central Bank (ECB) and the Reserve Bank of Australia (RBA) may have little choice but to further embark

on their easing cycle amid the growing threat for deflation.

EURGBP Daily

0.8000

0.8100

0.8200

0.8300

0.8400

0.8500

0.8600

0.8700

0.8800

01/03/2013 02/04 02/27 03/22 04/16 05/09 06/03 06/26 07/19 08/13 09/05 09/30 10/23 11/15 12/10

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

0.500 0.87485

0.618 0.84994

0.786 0.81448

0.236 0.85631

0.382 0.84078

0.500 0.82824

0.618 0.81569

0.236 0.86699

0.382 0.86090

0.500 0.85598

0.618 0.85105

0.786 0.84405

1.000 0.83512

1.618 0.80934

0.236 0.83736

0.382 0.84490

0.500 0.85100

0.618 0.85710

0.786 0.86577

[Template: DavidS]MVA(EUR/GBP.Open,10)(Hidden): 0.83459MVA(EUR/GBP.Close,20)(Hidden): 0.83537MVA(EUR/GBP.Close,50)(Hidden): 0.84151MVA(EUR/GBP.Close,100)(Hidden): 0.84613MVA(EUR/GBP.Close,200)(Hidden): 0.84968

0.84650

0.84310

0

30

50

70

100RSI(EUR/GBP.Close, 14): 58.82


54.00

Even though the EURGBP is a slower‐burning trade, the long‐term outlook remains tilted to the downside as it retains the bearish trend dating back to 2009. However, a steeper decline appears to be take shape as Mark Carney’s BoE moves away from the easing cycle. With that said, we will continue to look for a series of lower highs to sell the EURGBP, and the pair remains poised to face a pronounced decline in 2014 as the ECB prepares to implement more non‐standard measures in the coming months.

http://www.dailyfx.com/forex/fundamental/article/special_report/2012/12/28/forex_top_trades_of_2013.html?CMP=SFS-70160000000NbUBAA0


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AUDNZD Daily

1.0750

1.1000

1.1250

1.1500

1.1750

1.2000

1.2250

1.2500

1.2750

01/09/2013 02/28 03/25 04/17 05/10 06/04 06/27 07/22 08/14 09/06 10/01 10/24 11/18 12/11 12/28

Mar May Jul Sep Nov

0.236 1.12837

0.382 1.11519

0.500 1.10454

0.618 1.09388

0.786 1.07872

0.382 1.25082

0.500 1.21110

0.618 1.17139

0.786 1.11483

0.236 1.13087

0.382 1.10920

0.500 1.09169

0.618 1.07418

[Template: DavidS]MVA(AUD/NZD.Open,10): 1.10157MVA(AUD/NZD.Close,20): 1.10898MVA(AUD/NZD.Close,50): 1.12679MVA(AUD/NZD.Close,100): 1.13310MVA(AUD/NZD.Close,200): 1.16895

1.08594

0

30

50

70

100RSI(AUD/NZD.Close, 14): 25.65


The bearish trends in the AUDNZD should present more selling opportunities in 2014, and we will look to ‘sell bounces’ in the aussie‐kiwi as the pair looks poised to mark fresh lows next year. The 2008 low (1.0616) will be a key focus as the AUDNZD clears the 78.6% Fibonacci retracement (1.1140‐50) from the 2005 low (1.0428) to the 2011 high (1.3794), but we may see fresh record‐lows over the medium‐term as the RBNZ adopt an increasingly hawkish tone for monetary policy.


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Christopher Vecchio, Currency Analyst

GBPNZD – The Other Great Rotation

Coming into 2013, many market commentators proclaimed that it would be the year that the US

economy finally picked up off the ground, and that investors would reallocate funds from significantly

overbought US Treasuries to more cheaply‐valued US equities. The other “Great Rotation” is the return

of capital to Europe.

Money returning to Europe has two roots. First, growth is starting to return. The United Kingdom is the

fastest growing Western economy. Peripheral Euro‐Zone nations, while burdened with high taxes, low

government spending, and weak labor markets, have seen their respective recessions start to ease. The

resurrection of the European consumer over the coming years will be a major draw for foreign

investment in the region.

Second, I believe that the end of liquidity programs but not low interest rates forces investors into the

second tier of yield – improving, but stable growth. As concerns over emerging markets has risen

alongside the chances of QE3 being tapered, investors have started to shift capital away from some of

the major beneficiaries in FX – the Australian and New Zealand Dollars. The EURAUD and GBPNZD may

be best positioned to take advantage of these shifting themes.

1.2500

1.5000

1.7500

2.0000

09/20/2008 12/26 07/24/2010 02/19/2011 09/17 04/14/2012 11/10 06/08/2013 01/04/2014

2009 2010 2011 2012 2013 2014

EUR/AUD (W1)12/16/2013

0.618 1.57862

1.000 1.68594

1.618 1.85955

[Template: EMA Envelope]

1.502021.53996

0

305070

100RSI(EUR/AUD.Close, 21): 69.29



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EURAUD – The EURAUD remains in an ascending channel off of the March and November 2013 lows,

with a parallel drawn to the August high. An extension taken off of these prices points to a 100%

extension at A$1.6889. Note on the weekly chart that the momentum structure – indicated by the short‐

term moving averages rising above the longer‐term ones (from light to dark, EMAs: 8, 21, 34, 55, and

89). A sustained hold above 1.5000/20 through the 1Q’14 would give confidence for strength through

the year.

GBPNZD – The GBPNZD has started to emerge from its multi‐year downtrend, with the first instance of a

break higher coming above the descending TL off of the 2011 and 2012 highs. A sideways channel has

formed since May between N$1.8860 and 2.0060. In conjunction with the break of the TL and the

possibility of an Inverse Head and Shoulders pattern (Head: 1.7700; Neckline: 2.0060), a break higher

would target as high as 2.2300‐2.2500 over the coming 12‐ to 18‐months.


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Trade Opportunities 2014