EUR and GBP comment from NAB Currency Strategist Nick Parsons. – A psychological twist on market/investor behaviour.

I do not normally do market commentary or calls on this blog. – Though I have made the odd attempt, most notably, here on Apple Inc last April, a call which was wrong, being 6 months too early; such is the difficulty of timing bubble tops, and here on the EURUSD and EURSEK, from last August which proved nice timing, and a profitable little trade for me (See update on this chart at foot of this article.  – However, today I am adding a comment from yesterday from my one of my favourite currency strategists,  Nick Parsons of National Australia Bank. Nick is that rare breed, an economist who thinks about the market in terms of sentiment and positioning, as well as fundamentals and macro factors. Nick is well aware that markets are not just moved by the news and data released, but by the fears and desires of spectators as individuals and groups. More precisely, speculation is less about what you think, and more about what you think everybody else is thinking and doing. Those of you familiar with the work of John Maynard Keynes will of course recognise this as akin to the Keynesian Beauty Contest. – I hope you enjoy his article.

Friday, February 01, 2013 8:39 AM Subject: Nick Parsons-Daily Market Commentary February 1st 2013
Honoured as I was to be speaking at London ACI last evening, I was asked at what point the EUR would stop going up. The smart answer to this question requires neither a level nor a timeframe. Instead, I replied the euro will carry on rising until everyone owns it. When the last buyer has bought and there are no potential buyers left, then it will stop going up. We appear not yet to be at that point, mostly because there are some exceptionally bad investors and perverse incentives out there. 

In the fourth quarter of 2012, it was virtually impossible to find anyone with a benchmark weighting in the euro. Bulls, meantime, were simply non-existent. Even those people who could have been persuaded to scale back their short positions were afraid of doing so lest they got it wrong. The fear of being wrong completely overrode the desire to be right. (Ed: Underline emphasis added  to highlight the psychological aspect here). Looked at another way, making five big figures profit might not have brought a bonus but a five big figure loss would probably have led to the sack. After all, wasn't it obvious to everyone that the euro was a doomed project, set imminently to collapse? Being short the euro was the job-preservation trade. Since the middle of last year, our end-2012 forecast for EUR/USD was 1.33 and I lost count of the number of disbelieving, aggressive shakes of the head and vitriolic abuse this view was generally met with. Well here we are above 1.35 and despite a rush to buy euros given the freedom that a change of calendar year can bring, portfolio flows probably still have further to go, not least since some very big name houses are still peddling a sub-1.20 view to their unfortunate audiences. But, just as a currency goes up until the last buyer has bought, so it can go down until the last seller has sold. Our bearishness on the formerly proud pound has been well-documented here and elsewhere. That old maxim "never buy a pound you haven't already sold" still rings loudly on these old shoulders. Unfortunately, it appears in the very near-term that this view - and, crucially, this position - is now held not just by every forex professional, but every spread-better, taxi-driver, journalist and commentator. The pound has fallen a long way in the last 10 weeks, not just because the UK economy is an absolute dog, but its prior status as a supposed safe-haven goes into complete reverse if no-one now wants or needs one. Nothing whatsoever could persuade me to recommend a long position in sterling from current levels. Indeed, the likelihood of more dreadful data on retail sales, industrial production and retail sales during February and the BoE QIR Press Conference on Feb 13th will probably be fresh sterling negatives. At a time when everyone appears to now have the same position; however, it's quite possible that today will be the day we get to exit our short position. Fingers crossed, then, for a lousy PMI number at 09.30.

P.S.1

GBP PMI was weaker than expected, and GBP suffered another very poor day's price action. 

P.S. 2 

Below is an update to the EURSEK(EURUSD) comparison v Bund chart mentioned above.

"Euro Sign And Up Arrow On Screen" Image courtesy of Stuart Miles at FreeDigitalPhotos.net

FX Updates. - Let the pictures talk!

Some interesting price action on the forex markets. - I am not going to add to much comment here, but will instead present some mostly 'Big Picture' charts of EURUSD, EURGBP, EURAUD and USDCAD, with a few observations added. - The chart which looks the most interesting is the EURAUD in the wake of the surprisingly strong move by the RBA. 

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EURUSD - Not a Head & Shoulders Pattern

This is NOT a Head & Shoulders Pattern.

Nor is this:

Yesterday I was sent some research from a Tier 1 investment bank that went as follows:

EURUSD: Breached the head and shoulders neckline at 1.3037 and is also threatening to take out important support at 1.3004 (breached intraday already). A close below 1.3004 would confirm this bearish break and suggest a move down to the 1.25 area. 

Many years ago, I worked with a brilliant Technical Analyst who would react with fury on an almost daily basis to traders coming up to her telling her that they had found a Head & Shoulders pattern and had loaded up a position on the back of it.  When she looked into the pattern she would advise them that in nearly all cases these were not H&S patterns, and that their rationale for the position was incorrect, in most cases she was proved right. The biggest mistake she would point out was the Head & Shoulders patterns are ‘End of Trend’ patterns, they occur in the wake of a significant trend, and are usually relative in size to that trend. (There are of course other qualifying criteria this article here covers this nicely).

I was I admit quite surprised to see this investment bank sending out a report with such a basic error in it. – I do not dispute the overall bearish nature of the EURUSD at present, however the tendency to look for patterns in markets to supports one’s view rather than observing price action and data objectively are fundamental analytical flaws, more generally known as ‘confirmation bias’, it is also lazy analysis. 

I am not being pedantic here (ok maybe I am slightly), but from my experience mis-labeling of patterns can create a false sense of confidence. I do not disagree with the fundamental premise of the analysis, a close below 1.3004 would be bearish, however the readers attention would have been drawn to the initial comment about the neckline of the Head & Shoulder being broken, this may have led them to false conclusions more so than the qualifying comment which followed it. 

 

To finish I would like to present some good examples of Head & Shoulders patterns: The chart below shows the SP500 over the past few years, with three major ‘Head & Shoulders Patterns’, two successful and one failed. – The two successful ones proved spectacularly effective at signalling sharp moves ahead, the other one not so, however even failed patterns can prove useful, in that their failure can often signify that the prior trend is likely to re-assert itself. And note how the failed pattern itself ended in a perfect inverted Head & Shoulder Pattern.

When Head & Shoulders patterns work they can be spectacularly successful signals for market direction, however the world is littered with failed traders who spent too much time looking for patterns which aren’t or weren’t really there.

EURUSD v Debt crisis

Over the past couple of weeks, with the latest leg of the on-going European Debt crisis hotting up, I have heard from a number of traders telling me that the EURUSD is about to collapse, a view which I must admit I have had some sympathy to. However, despite the market throwing the proverbial kitchen sink at the troubled Euro, it has once again seemed to defy the wishes of many and shown remarkable resilience.

I decided to see whether there has been a decent visible' correlation between heightened European Debt fears or not over the past year.  The chart below, shows the EURUSD (top), versus Spanish 10 Year government bond yields (bottom). - What seems apparent is a lack of any visible correlation between panics on Spanish debt (yields rising) and the value of the EUR versus the USD over the past year. -  During the summer panic the EURUSD remained sidelined in the low 1.40s, during the October - December Panic the EURUSD started and finished in the low 1.30s, but did spike up to over 1.4000. It would seem that the damage to the EURUSD tends if anything to follow in the wake of action taken to allay the panic. The current panic, whether it is over or not, does seem to be following along similar lines so far, with the currency remaining resilient just above 1.3000.

EURUSD – Update: This week could be a key turning point.

Yesterday’s FOMC release was the catalyst for a sharp fall in the EURUSD, taking it down from a day’s high of 1.3368 to a low of 1.3213. However there is a possibility that yesterday's move carries greater significance longer-term, and could be the early stages of a more significant turning point in the EURUSD towards a more bearish trend.  

Two weeks ago I posted a rather speculative article (what article is not speculative when forecasting markets!) about the EURUSD which I termed ‘Clash of the wedges’ (this can be seen here).  This article favoured a move towards 1.34/35 which would then be a pivotal zone, with the favoured move back lower from there, and possibly much lower if it could start breakin through 1.3000.  

This update adds the weekly chart of the EURUSD to the previous analysis. As you can see this has made a rejection of the upper line of the major EURUSD downtrend in the past week.  I feel that the scenario is starting to favour the downside again, in fact it seems that the fundamental and technical picture may be starting to align - bearishly. A clear break through the recent low at 1.3134 would increase the odds this process is underway, with a meaningful break through 1.3000 hinting at much lower levels over the medium term. The alternate view for upside potential is not completely written-off yet, but I feel that the tide is turning strongly against this option, which would require a solid break through the upper trend-line at 1.3380 to bring this back into play. 

USDJPY EURUSD AND EURAUD UPDATES

USDJPY

Further to my recent posts on USDJPY highlighting the prospects of significant gains (See here) and the more recent post highlighting the possibility of some consolidation for a few weeks (See here), I thought I would update my view as it stands. But first an interesting chart showing the US v Japan 2 year govt yield spread over the past year versus the USDJPY.

There seems to be a clearly visible correlation between these two.  Though I always caution against to much reliance on correlations, one can see that this correlation is suggesting that the USDJPY spot fx rate may have got slightly ahead of itself. - I myself am looking for a pullback possibly to the mid 81s on USDJPY at some point in the next couple of weeks, though in the volatile world of fx it could easily over-shoot a little. - Overall I remain bullish longer-term though I may have to review if USDJPY starts making value below 80.00.

EURUSD.

EURUSD continues to behave largely in line with how I thought it may unfold in the previous post. 1.34/35 is my pivotal area for this. -  My longer-term view on EURUSD is for bearish forces to re-assert themself, with 1.34/35 capping. However a clear break through 1.35 would suggest to me that this may be off the table for now at least and may bring 1.40+ into play longer-term. - I still find it hard to believe that people will be happy being long EURUSD in the bigger picture with so much strife still existing in the Eurozone. (How ironic that as I write that, as I sit long at the moment, but in fairness it is a short-term view with a trailing stop and take profit in the mid 1.34s. - However, it only takes many people getting short-term long and stopping out of shorts, to keep pushing this higher. - 'That is how this thing works'.)

The chart below shows the current EURUSD with a couple of interesting technical aspects. - Further to last week's post, I still believe we are re-testing the recent high and the breakdown of the trend-line, this line acted as resistance yesterday, and may continue to cap though rising quite sharply all the time. On the downside, 1.3290/1.33 appears as if it may be an important pivot, initially providing some support.

EURAUD

I called this a few weeks ago (See here), only to find a reason to talk myself out of my long (See here). 

For now, for me, this horse has bolted, with a good chance we could see 1.3100 area pretty soon.

EURUSD - CLASH of Wedges + Some futher observations on EURAUD, SP500, US 10 YEAR, USDJPY..

EURUSD FX
A couple of years ago I wrote about what I termed 'The clash of the wedges' on the SP500, the post can be seen here. We seem to have another smaller scale version of a clash of the wedges on the EURUSD. - Just for the record 'Wedges' are subjective patterns which usually indicate a temporary interruptions of the previous price trend, they can appear at terminations of trend, and can also appear to be occurring at the onset of new trends before the wedge actually morphs into a new trend. Technical analysts see a 'breakout' of a wedge pattern as either bullish (on a breakout above the upper line) or bearish (on a breakout below the lower line).

I have noticed a number of occasions in the past when the breakout of a wedge takes the form of a new wedge, thus evoking a 'clash of the wedges'. One would normally expect the outcome to favour the major wedge, though this is not always the case as can be seen on the lower of the two examples below. I have produced a chart showing the current EURUSD wedges and some further charts below highlighting a couple of previous examples each with a different outcome. - In the first example the major wedge dominated, though not before the minor wedge had put in a strong showing, and in the second case the minor wedge overcame the major wedge and emerged dominant. - At this stage, I would favour slightly the major wedge, to emerge strongest but it is certainty not a given, and in the meantime, there is every chance the minor wedge pushes the EURUSD back towards the recent highs around 1.34/1.35. - As I said I would slightly favour a re-emergence of the downtrend from there, however a solid break through the 1.35 highs is likely to favour further EURUSD strength possible towards 1.4000.

SOME FURTHER OBSERVATIONS AND UPDATES.

EURAUD FX - DIAMOND PATTERN UPDATE:  This may have made a breakout of thIs basing pattern today, though given my own antipathy to these formations (See post here) I would still heed caution on this.

US 10 YEAR NOTE FUTURES: Similar emergent price behaviour over the past years to EURUSD in 2009.(See below). If this continues to unfold in a similar fashion, we may soon some period of consolidation, before further significant losses emerge int he months ahead.

 

SP500: Finally, my recent comparisons of SP500 rallies of late, which hinted at possible top in early-March proved to be somewhat wide of the mark.- Which goes to show how one should always treat comparisons with previous behaviour somewhat cautiously. - Which ironically leads me onto some comparisons with previous behaviour on the SP500. - A couple of weeks ago the SP500 produced a weekly 'Hanging-Man' candle, the chart below shows a number of these patterns emerging after some sustained weekly rallies. In the highlighted cases the hanging man was followed by further strong gains usually for another couple of weeks, followed then by some fairly wide-ranging consolidations back in all cases to the top of the 'Hanging-Man' candle where support kicked in. - In this case, were this to occur again, then the top of the 'Hanging-Man' candles would offer good support around about 1370. - Note, these previous consolidations were merely resting places for the rallies to re-charge themselves for further gains later on. 

 

USDJPY FX:  Last but not least the USDJPY, I highlighted in a post a couple of weeks the significance of a close over the 95 Week SMA (See post here). Since then it has continued to solidify these gains. I have updated the USDJPY chart below to show activity since that breakout. - If previous break performance is to be echoed, then I believe in the next couple of week, we may see a re-test of the moving average. This could bring USDJPY back down to 81.00-81.30, where support/new buyers would be expected to hold it before further significant gains emerge over the course of this year, quite possibly carrying this much higher into the 90s at least. _any significant moves below 81.00 on a sustained basis may cause me to question the assertion of further USDJPY strength.

Finally bringing all this together: The outlook for T-Notes appears to suggest further losses in months ahead, the SP500 further gains, and the USDJPY further gains, however all appear to be close to a period of consolidation of recent moves, thus I would be on the watch out for some corrective/consolidation activity on all these markets over the next few weeks.

EURUSD and EURAUD appears to be un-synched a little from these risk asset classes of late and following their own direction. EURUSD may see some further gains towards 1.34/35, however I think this zone may be pivotal, with my current preference for the EURUSD waekness to re-assert itself. EURAUD may be making a significant base, but I remain cautious as to whether to trust this right now. 

The 'Trader,Trading & Risk Psychology' Blog is part of 'BGT Edge' a trader and investor coaching, development and education company. - To know more about how we can help improve your Trading or Investing Performance from a psychological or behavioural perspective, and how it could help drive you towards greater 'trading success' please email me on sgoldstein@bgtedge.com or check out my website www.bgtedge.com.

Does perception mislead reality in trading?

I have been asked to respond to a question in relation to an upcoming webinar I am providing to FX traders at a proprietary trading house. The question is as follows:

Should EURUSD traders consider switching to alternative currencies such as the AUDUSD, or even different products, in light of the casino that has been the EURUSD market over the past 6 - 8 months?

When I was asked to respond to this question I thought yes this seems reasonable, EURUSD has been a very difficult trading currency for many in the past year, with the rumour-fest that was the 2nd half of 2011 messing with many people's trading accounts.Whereas there is a common perception that the AUDUSD had been a good trending currency in recent months with manageable levels of volatility.

I decided to put this question out to a number of trusted friends and contacts at various investment banks and hedge funds to illicit some of their responses. The general tone of the response has been that switching markets away from what one is use to is fraught with danger, taking one away from their core capabilities, strengths and areas of familiarity. However, it was also generally pointed out that the AUDUSD has been a steadier trending and trading currency that the EURUSD over the past year. 

However, one respondent disagreed totally, his assertion was that the AUDUSD has not been less volatile than the EURUSD nor a better trending currency, it is just that AUDUSD traders are more familiar than EURUSD traders with the excessive volatility, and that the relative conditions were less unusual for AUDUSD traders compared to EURUSD traders. - This was an interesting point which particularly resonated with me as last year my EURUSD trading left something to be desired, whereas my AUDUSD trading last year was extremely successful. Had this been the case, that I did not need to adjust my trading on the AUDUSD as its behaviour was not so different to what I had been use to over the years? Whereas my EURUSD trading was a different story, cutting me out more often than would normally be the case, and providing me with misleading signals relative to its usual behaviour.

I decided to look at this phenomenon a little further, I have produced some charts, based off the size of daily price ranges relative to price (this allows for a comparison of two different currencies performance, and compensates for the changing price level over time). - I was adamant, that the EURUSD had been far more volatile than the AUDUSD in H2 last year, and I sensed that many people shared that opinion. The data however tell a different story. 

The first charts below show data from the year 2000 to the present:

• EURUSD to the left and AUDUSD to the right.
• The top charts show the 20 day average range as a percentage of price. 
• The lower charts show the 10 day average of the 10 day standard deviation of range as a percentage of price.
• The area marked in the Red border is the data for the second half of 2011.

Is this a case of lies, damned lies, and statistics? - The next charts shows the AUDUSD daily and the EURUSD daily over the past 9 months. 

Looking at this , not only does the AUDUSD look more volatile on a daily basis, its also looked that contrary to a few opinions the EURUSD had been more trending than the AUDUSD. 

Finally the last charts show the period from the beginning of June last year through to the end of December, highlighting the daily range relative to price for each currency. 

I think it is crystal clear from these last charts, that despite the rumour fest which coincided with the European Sovereign Debt crisis of last year (still on-going), the EURUSD was not more volatile than the apparently safer (in terms of volatility) AUDUSD, despite what seems to be a quite common perception out there amongst many FX traders, that teh opposite is true. (Unless of course I am canvassing opinion from a very small group of unrepresentative traders.)

Thus answer to the original question. - If one was to move to the AUDUSD to escape the volatility of the EURUSD they would actually be increasing their exposure to volatility, and not escaping it.

In fact to further quote one of my good trading friends, who had an excellent year on the EURUSD last year bucking the opinions of many others, 'The key is to see it for what it is and to look at the opportunities it provides, rather than see danger at every turn'.

With regard to the question - Does perception mislead reality in trading? - I think this is a bias which affects many traders, and indeed can affect whole groups.