Weekly Analysis 12 January – 18 January 2015

The market this month

The “Spaghetti Western” theme songs are playing in my head while I´m typing and it´s not hard to figure out why.
Trading forex this week felt like being in the Wild West in the 1800's.
The forex market has been crazy and our results have oscillated up and down the whole week, 
but we finished on the right side.

So lets get back to business. The Forex market has been chaotic this week.
We saw some extraordinary moves during the Russian Rubble crisis last month, but not many people trade the Rubble and its impact on other crosses was limited. The Swiss Franc though is one of the major currencies so its impact is bigger. The Swiss National Bank had a peg put in place for more than three years on EUR/CHF at 1.20, meaning they would intervene by buying, if the price on this pair reached that level and we know that they have unlimited resources ready to use. So many retail traders placed buy orders as the price got close to that level with the idea that they have the Swiss National Bank covering them. On Thursday they unexpectedly announced that they removed that peg and replaced it with a negative rate of -0.75% for deposits. All the currencies lost about half their value against the Swiss Franc in a matter of seconds. Those who got their stop losses hit were the luckiest, because the move was so fast that the price skipped the stops on many brokers’ platforms.

Those who were short on CHF and missed the stop, have to look at their broker’s terms and conditions to see if they guarantee stop losses. If they do then they are obliged to issue you a refund for the losses incurred beyond the stop, if they don´t then there´s nothing to do about it unfortunately. It´s not only traders that got busted though; the investment banks are among the losers with Citigroup loosing around $150 million. Many brokers also endured severe losses. FXCM lost about $250 million, more than half its assets and there´s talk of a takeover from another company to save it from bankruptcy. The hedge funds usually trade long term charts, so their exposure to CHF was only about 2%, unlike retail investors who were 90 short on CHF.

One good thing that came out of this Franc mayhem is the assurance that the market got about the ECB QE program.
If the guys at the Swiss National Bank weren´t sure about the ECB program starting soon, they wouldn´t have removed the peg. The EUR/USD fell 200 pips to 1.1560s initially as a reaction to EUR/CHF selling but recovered the next hour. Eventually the market got the hint about the ECB and the selling resumed, reaching 1.1450 on Friday. The US Dollar was the sole beneficiary in the market this week and gained in all the crosses, if we don´t take the Swiss Franc into account.

Economic data

The Swiss National Bank decision was the main event and the biggest market mover this week but the economic data shouldn´t be disregarded, because it paints the broad fundamental picture. The only piece of data on Monday was the Australian home loans month/month which was negative. On Tuesday the UK CPI came up at 0.5% versus 0.7% expected and 1% the previous month, but the GBP wasn´t affected by that because the energy prices contributed to that, since the Core CPI didn´t change. The European Court of Justice ruled on Wednesday that the ECB QE program is compatible with the EU constitution so EUR/USD fell 70 pips. Later on that day the US Retail Sales posted a 1% decline month/month, showing that the US economy might be affected by the slowdown that the rest of the world is going through. It´s not worrisome for now, but we´ll watch the US data closely on the coming weeks/months because it might put pressure on the FED to delay the rate hike.
We covered the Swiss National Banksurprise on Thursday so no other economic data can top that. On Friday the data showed a surprise pick up in the US consumer sentiment, adding even more strength to the USD which was already well bid.  

All technical support indicators have been breached, leaving us with no clues for a short term base. 

Forex Signal's

What a roller-coaster ride this week has been. We started it pretty bad losing about 40 pips on Monday than we recovered on Tuesday, closing the day with a 60 pip profit. Wednesday was even worse than Monday, and we ended up 165 pips in the red that day. We all know now, what happened on Thursday, at some point we were 160 pips down for the day and 300 pips down for the week. Knowing that in troubled times the money flies into US Dollar, we decided that we were only going to play it on the long side and increase the long term signals in order to avoid getting whipsawed. So we wrestled the market and managed to close Thursday 15 pips up. Friday was our glory day when we made a massive 200 pip profit, mainly from the long term signals.

We had 28 winning signals and 9 losing ones, giving us a 76%/24% win/loss ratio. This week we made 67 pips in total.
If we separate the long term signals, we see that we made 230 pips from them. If we don´t take the EUR/CHF signal, which we opened on November, into account, the new strategy has worked well. 

The Stochastics indicator has been a good signal provider to sell this pair.   

Pair analysis

EUR/USD is in no mans land if we look at the monthly chart. All the levels, the moving averages and both support lines have been clearly breached and there´s no technical obstacles to this downtrend to be seen anywhere in the chart. So rather than predicting a base, we'll try to sell this pair if it retraces to the bottom black line. The ECB Quantitative Easing program is getting closer and the pressure keeps increasing on this pair and on all other Euro pairs. It´s true that the same as oil, it has fallen too much too quickly, but it has traded below this levels for many years before 2003, even below the parity level. On the hourly chart we can see the steep decline that followed the Thursday events.

GBP/USD is often called “The Beast” because of its enormous moves and that name suits this pair quite well.
It has fallen more than 1,200 pips in the last two weeks but the overall trend is up, so this dip might be a good opportunity to open a long term buy position, targeting 1,000 to 1,500 pips. The 20 and the 50 moving
averages have been providing support during the uptrend and we got very close to the 50 MA on Friday morning
but bounced back up and we are about 200 pips above now. I don´t like to chase trades so we might have missed
the chance. If it gets close to the yellow MA in the first days of the coming week, I´ll definitely buy this pair with a 
stop below the last two black lines. GBP/USD is near the 1.50 support level and the retrace of the uptrend in 
USD/JPY seems to be over, so they support the idea of buying this pair. 

We are close to the 50 MA which has provided support together with the 20 MA.

The 100 MA on the daily chart comes at the same level as the 50 MA in the weekly.

In Conclusion

We complained about high volatility and uncertainty during the Russian shock, but this week has exceeded all expectations. Yet, we made it through with some profit.
We hope you made it through the Swiss Franc ordeal without heavy losses. 
Our thoughts go to those who lost their accounts this week, and we're wishing you all allot of success in the future.

The end of the retrace is confirmed if the price moves above the 20 and 50 MAs in the H4 char

ABOUT THE AUTHOR See More

Skerdian Meta

Lead Analyst

Skerdian Meta Lead Analyst. Skerdian is a professional Forex trader and a market analyst. He has been actively engaged in market analysis for the past 11 years. Before becoming our head analyst, Skerdian served as a trader and market analyst in Saxo Bank's local branch, Aksioner. Skerdian specialized in experimenting with developing models and hands-on trading. Skerdian has a masters degree in finance and investment.