This week starts with some strong follow up movement to the end of last week's trading themes. EURO is higher, GBP is lower, and JPY is drawing a lot of attention.

There is not a lot of fundamental news out this week. Both the BoE and ECB left rates alone last week, adding a bit of language stating that they wish they could pull some liquidity out of the markets. Left unsaid was that they can not yet do so. So no change on the near-term horizon for short term rates or liquidity facilities for the US, UK or Eurozone.

There are two data releases that could have a strong effect on GBP this week. The Sept RICS House Price Balance on Tuesday morning (UK time) and the Sept Employment Change data on Wednesday morning (UK time). To us, the Sterling Pound is on a downward slide and we would look to be short GBP going into both numbers. We feel there is a lot of doom and gloom feeling towards GBP and a miss on either of those data releases could cost GBP dearly. On the opposite side, both numbers are expected to beat their previous numbers so a positive outcome is partially priced in. Additionally we note that as for most currencies lately......bad news hurts worse that good news helps.

We read a great report in the Financial Times this morning. JP Morgan Chase estimates that Leveraged Japanses day traders aggressively bought US dollars last week bringing their net long dollar positions to a record. Anyone who has read this column regularly knows that we are keenly aware of sentiment indicators and that we love taking the opposite side of leveraged day trading flow. As soon as I read that this morning, I sold USD/JPY (current bid 89.99). In general we stay away from JPY-based trades as we feel there is a disproportionate level of government intervention in JPY, but we will take a shot at this trade.

We continue our bullish position on EUR/GBP. We first put on the long position on Sept 18. (www.backbayfx.com/blog.php) Since then we successfully jumped in and out once around a data release, and continue to see all signs pointing upwards. As noted above, we think there is a good risk/reward scenario for GBP to fall this week on fundamental news, and our long EUR/GBP position keeps us positions for that potential move. See Chart below.

Gold. We have a had a few successful trades in Gold, and we have missed a large opportunity. A week ago, we were looking to short Gold if the pair could not break through the $1,024 level on an intraday basis. Well that was the day that Gold moved higher by approx $24 per ounce. It was both a good reminder why we do not chase moves (we did not enter our short-trade), and a scolding that we were not looking at the opportunity with fully open eyes. We noted in our posting Oct 5th, and in previous postings, that we were confident of Stop Loss levels between the $1,020 level and the $1,030 levels. We even had a good short using that information a few weeks prior in mid-September. But what hurts is that we needed to see the other side of our trade idea from a week ago. We thought about going short had the $1,024 level held as a top. But we did not give enough thought about what would happen if that level broke. In general, when Stop Loss levels ar hit, there is a panic by those traders who had that level in mind, but did not use a Stop Loss order. We know from our time spend on a dealing desk that for every Stop Loss order at any given level, there may be a multiple of traders who have that level in mind, but will use market orders to exit their positions. It makes for a tidal wave of orders as traders will pay any price to stop the bleeding. that is what happened last week in gold. The Stop Loss levels were triggered and all those short term traders who were short needed to both buy back their short positions, AND get long! It is a lesson learned for us to make sure we think about the possibilities on both sides of important price levels and where the next move may be.

A final note on EUR/USD. We have recaptured the 1.47xx handle and solidified above there. We will re-enter our long EUR/USD trade sometime today or tomorrow. However, as the EUR/USD image below shows, we are in a tightening Bollinger Band time and we are therefore looking for a strong move in the pair. Clearly we expect the move will be to the topside, but we are wary for any fundamental news that could start the slide lower because we feel we are due for a strong movement in either direction for a day or two. Do not be surprised to see a 200 pip movement either up or down this week. We remain committed to our belief that we will see the 1.53xx handle by Thanksgiving.

Stay Nimble!

Stephen Leahy

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