I forgot to comment on the GBP. CPI was released today and it looks to have led to some strength. This isn’t really surprising given how weak the currency has been over the past week or so. Interpreting the actual impact of the CPI can be quite difficult. In the UK the strength of the £ has a great deal of influence over CPI, and CPI has a great deal of influence over the £. Understanding exactly how the economy and policymakers are going to respond to a certain level of inflation can also be tricky. I am not surprised that the market has been bid on these numbers. The market has moved a lot over the past few days and these numbers are solid and give a chance for bulls to push back. I am surprised that the strong US consumer confidence numbers didn’t have much of an effect but I think this is a sign of how far the market has come.
I was stopped out in USDCAD, I am taking another shot at the next level down. Again though, I think this is a sensible level to try but it is worth keeping control on risk here as it is clearly a very crowded level.
The interesting move today was in EURUSD, the comments by ECB members early on the day seemed to lead the market to expect that Draghi was going to come out hard against EUR strength. This didn’t really happen and it clearly caught the market out. The rally stopped at resistance and I don’t actually see that much to change a more bearish stance towards the EUR. Interestingly, there has been the suggestion that EUR is now benefitting from safe haven flows. This seems ridiculous considering where we were two years ago but is much more plausible considering the extent to which EMs have accumulated $ and are now reconsidering given recent changes in interest rates. I have heard that CB buying was behind the unusual rally late yesterday.
Unsurprisingly, the only interesting level that I am seeing is in EURAUD. Given the strength in AUDUSD, I am not particularly inclined to take a shot at this. The rally in EURUSD clearly was justified, but it was more a technical rally than a sign that the EUR is going to be showing any real momentum. If I was going to go long the EUR or short the AUD I think I would try going against different currencies. Nonetheless, this is an interesting level to watch out for.
We have US Durable Goods tomorrow, JPY CPI the next day, and EUR CPI the day after. My concern here is whether we are going to get any pushback on the USD with a really light upcoming schedule, I think this is quite possible and I am expecting the GBP to catch a bit of strength again. As with the AUD, we will look to the level above and if we get a first break through then it is probably a pretty strong sign that the trade is bad. I think the real focus here should be on the EUR again. There is a huge amount of attention on CPI and the effects that the strong EUR might be having on CPI, I think markets are really looking at this release for direction.
I have tried to contact the people who run this forum due to the deletion of previous posts. As they haven’t responded I can only assume that it would be fine to ask people who are interested in this kind of trading to PM me as I am setting up a community to share information and everything. This isn’t a commercial project or anything, I am just setting up a community to further my own and others knowledge and understanding.
The trade in USDCAD was stopped out as the CAD moved higher. I was quite surprised by this and the move lower doesn’t look particularly convincing but I can’t really justify any further attempts given the break of support. I still the like the USD and CAD continues to look like one of the weaker currencies but I am clearly wrong here.
Before moving on it is also worthwhile mentioning the EURCAD. I closed this yesterday (or the day before) and this was a fortunate move as this has dropped much faster and is now coming to interesting levels.
My inclination would probably be to buy these levels but I think sentiment around the EUR has changed. The EURAUD easily busted through a really solid support level that had held since December last year and the move up yesterday in the EURUSD was extremely unconvincing. The EURGBP is approaching support and if I was to pick any currency to buy the EUR against it would be this one. I am going to continue watching this today to see what happens.
I am not actually sure that we do see further monetary policy action from the ECB. If the BOJ was to act then we might but I think the recovery will continue to grind on at an unremarkable pace. The market is clearly moving in another direction though. When this happens it is usually best to shelve the fundamental view for a while and just keep watching. At the very least though, my view is that EUR won’t do anything substantial to the downside (although maybe it will against the AUD).
The AUD was up strongly overnight on comments from the RBA Governor Glenn Stevens. The speech was broadly positive on the outlook for the economy noting that the economy was making a good transition away from the resource sector whilst warning against housing bubbles. No comments were really directed specifically at the exchange rate, he has previously made comments supporting a lower dollar, perhaps due to the effect that exchange rate was having on inflation through higher import prices.
The market is clearly bullish on the AUD, I continue to be sceptical. The RBA Financial Stability Review clearly notes the presence of exuberance in the housing sector, the high exchange rate hampers competitiveness of Australian products, and the transition away from the resource sector is sure to be bumpy and is at a very early stage. Part of this rebalancing away from the resource sector will naturally be a lower AUD.
The market continues to have a different view though and I am not going to fight the market. Strength against the USD and CAD has been impressive. Whilst I don’t think the outlook is particularly favourable for the AUD, there isn’t much for the bears to grab onto either. In the absence of any countervailing forces, the AUD is quite clearly going to keep going up. I was probably too slow to recognize this, especially against the CAD. I am going to start looking at ways to play this trend. EURAUD and AUDCAD were two good options but I have missed the boat both times. Again, this is something that I will be watching.
The big news upcoming today is US Durable Goods, this might provide some direction for the USD. We are already short the GBPUSD so we have exposure. The USDCAD is probably a better option but I have missed two entries already so I am not going to keep firing.
Selling EUR against 50% GBP and 50% AUD. Going completely against what I said earlier on, this is a hedge against half of the GBP exposure and the AUD exposure seems decent after the break of a big level. If I am going to try and play the other side of my views then I think this is going to be the best opportunity I get. The market has clearly been fairly bullish on the EUR and sentiment has taken a turn recently, I am not completely convinced by the fundamentals but I am clearly out of step anyway at the moment. I picked the AUD because the level was important and the break was strong, not much to say. I picked the GBP because I think if the EUR was to weaken it would really catch people out here and I like the chance to buy back a bit of the GBP I sold against the USD (for now). The level in EURGBP was also quite important although the break was far less emphatic. I am going to keep tight stops here again, as with the USDCAD position.
Buying USD against JPY. Tight range with important numbers upcoming (I should make this clear, not today but tomorrow). I really have no idea which way the numbers will go but I expect that whatever way they go, they will interpreted as being bearish for the JPY.
GBP has rallied strongly on the back of retail sales. I was short GBPUSD and short EURGBP.
I would like to say that this was a particularly skillful move but it wasn’t. I actually was thinking about closing out this position as soon as I put it on. I usually make trades a bit earlier on in the day and I would have closed out the EURGBP short but I, luckily, was caught up in doing something else.
Anyway, retail sales came out much stronger than expected and GBP rallies. My view from here is that we have moved more than enough. I stopped out for a 60 point profit in GBPUSD but I have decided to open the same trade up again at a slightly worse than my old one. Volatility may continue with GDP numbers but I just can’t see any move sustaining above this level, regardless of the numbers. The resistance I have around 1.6640-6650 doesn’t look particularly solid but it is holding for now which is enough.
The EUR is showing more weakness across the board. Looking ahead we have economic confidence and GER inflation on Friday, then EUR inflation on Monday, and then the rate decision later in the week. I am looking more at EURCAD and EURAUD for direction here. Both have been extremely weak, whilst EURUSD has actually held up quite well. I am doubling up the EURAUD into a full size position. Although I got away with it, I should have been far more aggressive here. This is a break of a big level so it is really the spot to go for it.
The USDJPY trade yesterday went instantly and horribly wrong. Thankfully, I got stopped out quite quickly. Whoever was buying JPY was really determined to get it done and they busted through that 102 level strongly. I still have the same overall view but I don’t think it was a particularly strong level to get in at and I can’t really see much of an opportunity to get in before all the JPY data tonight. As mentioned already, my current view is that, regardless of where the data actually comes out, it will be taken as a sign that more easing on the way, I have no position though.
The USDCAD looks interesting to me. I tried to buy some a lot higher and it really didn’t work. I think everyone is surprised at how far the USD has come off here and I see no way for this move to be sustained. After getting burned twice I am still slightly cautious but I am going to try buying here. Next week is CAD GDP (Monday) and CAD unemployment (Friday) as well as US ISM (Tuesday) and US NFP (Friday) so a lot of big news. We also have some more US data today and tomorrow. Bulls have been burned but I think it is extremely likely that we get buying into next week.
Finally, the NZD is at a very interesting level rising to near high against the USD. As I have mentioned before, I don’t follow this currency too closely, although I should as interesting stuff is happening as they are raising rates. I am probably not going to play this but I am going to keep following closely and look for interesting setups.
Chart of the day: NZDUSD Weekly
The CAD is continuing to show a great deal of strength and the USDCAD trade was stopped out. There is a lot of CAD data upcoming next week, as well as NFP, which should break the chop that we are seeing at the moment. I continue to be sceptical about the CAD, rate hikes have moved closer in the U.S. whilst the CAD economy seems to have weakened. However, interest rates are higher in CAD which is supporting this rally. Looking at the CADJPY makes this quite evident, there has been really not fundamental news but the currency has rallied as investors seek yield. Either way, next week will clearly be important.
The EUR has begun spewing already ostensibly on weak Spanish CPI numbers. There has been a huge amount of bearish momentum building in this currency. So far, the EURUSD was holding up well but looks to have cracked last night/this morning. I think this data is quite minor if we think about the bigger picture but traders are really selling the currency hard. When currencies move down (or up) strongly on really light (or no) news then it is really best not to try and fight that trend. Currently the EURAUD short is working out. I would prefer to be buying another currency, the AUD is just so volatile and I don’t think it will be a good pick over longer time periods. At the moment, it is fine but it makes sense to start thinking about when we should look to start selling EUR against another currency.
JPY was broadly unaffected by yesterday’s data. I don’t think the data was too surprising but this should be taken as an indication that everyone is waiting for something to happen. The introduction of the consumption tax next Tuesday, next week’s data, and the rate decision the following week could all be factors. I think it is going to be choppy until then and it is only really worth getting involved at the bottom of the current range.
GBP moved up strongly on yesterday’s retail sales breaking through an important resistance level on the GBPUSD. To my surprise, it proved capable of holding this support but the GBP is weak again this morning and, as I speak, is taking another run at support. The data released this morning, including the final Q4 GDP revisions, don’t look terrible but the reaction has clearly been quite strong. The move up on retail sales was really quite ambitious and I think the natural level is below this support. Retail sales probably isn’t indicative of broader trends in the economy and is quite a volatile series so I do expect to see this support go at some point, I am short GBPUSD.
Chart of the day: EURUSD 4hr
Selling more EURAUD on a nice hourly pin. The same pattern is up on the AUDUSD too, I think the EURUSD presents a slightly better option. The sentiment on the EUR is definitely worse and I think the current rally isn’t really sustainable. Confidence data was better than expect but we haven’t really come close to challenging any significant levels. The upcoming news does make the position more risky, the outcome of the trade will (probably) be determined by the data (although it is a Friday so it is hard to tell) but the level is good so we can take some measured risk.
GBP: Last week saw the reversal of the prevailing trend in GBPUSD. Price broke through the 1.66 level on strong retail sales. Price struggled to move higher after crossing this level but found support on the re-test.
The GBP is also trading at interesting levels against the CAD and AUD. The latter found tremendous strength last week as it broke through 1.8140 level early in the week and then moved quickly down to the 1.79 level before finding support. Against the CAD, the GBP failed to break out to new highs last week and fell away quickly this week before rallying strongly at the same point as against the USD and AUD, although with much greater strength.
The coming week is quite light for GBP data, Thursday’s PMI data is perhaps the only point worth mentioning. By contrast, most other currencies are reporting out major news. EUR CPi on Monday, German unemployment on Tuesday and a rate decision on Thursday will attract most of the attention. In the USD, ISM Manufacturing on Tuesday, ADP Employment on Wednesday, ISM Non-Manufacturing on Thursday, and NFP/Unemployment on Friday. In the CAD, GDP on Monday and unemployment on Friday. In the AUD, a rate decision on Tuesday.
This will put the major focus on data from other economies and will lead to more weakness for the GBP as attention is drawn to the relative strength of other economies, particularly the US. Selling GBPUSD at the current level would be unwise as we are towards the bottom of the trading range. Any break of the 1.66 should be the signal for selling.
GBPAUD is a more favourable sale at the current price. We are towards the middle of the current channel but momentum is more clearly in favour of the bears. However, this position should be evaluated in light of other current exposures.
EUR: The focus of markets in the coming week will overwhelmingly be on movements in the EUR. Markets were surprised both at the strength of the EUR against the USD and the huge weakness in the EUR against the CAD and, to a lesser extent, the GBP.
It has hard to delineate the exact positioning of the market but it seems likely that investors are now expecting some movement from the ECB. Draghi appears to be slightly more hawkish than others on the ECB Board but the market will really look to CPI on Monday and German unemployment on Tuesday to guess what the ECB will do.
I have no opinion real opinion either way. The data is certainly indicating a weakening of the EUR economy but Draghi’s reticence to be drawn out last week gives me pause. I think it is wise to wait until next week’s data. I expect that the EURCAD will be the most volatile, there is a lot of data coming out of CAD and I think the current week will determine direction. Despite last week’s move, I expect the EURGBP to broadly range bound.
The EURUSD is sitting at an interesting level, just below resistance in the 1.3770 region. I am currently short the EURAUD but it wouldn’t be unwise to consider switching this into EURUSD at some point. The AUD is certainly more volatile and could provide more upside in the short-term but I feel the fundamentals of the USD are significantly stronger than the AUD. We also have the AUD rate decision to consider, although it is unlikely that we will have any surprises here. At the moment, I am just going to stick with my current position and see what happens. If the ECB does something unexpected, the downside will be greatest across the AUD and CAD crosses.
USD: The weakness of the USD continues to confound markets after the timetable for Fed rate hikes moves closer. In particular, the huge decline in the USDCAD appeared to confound markets, and myself. The USD found some unexpected strength late in the week against the JPY, which had been trading in a very tight range, but broadly it was a very poor week for the USD. Weakness against the AUD was also very significant.
The timetable for this week is quite heavy so I expect that the USD to find some momentum. As always, the focus will most likely be on NFP but ISM numbers should find a larger audience too.
I expect that USD will find most strength against the CAD and AUD. The move up in both currencies was rapid and investors are possibly looking at the yield differential again. I am not particularly inclined to try and bet against the AUD. The rate decision is unlikely to surprise and while investors will be drawn by the strength of USD data, it seems unlikely they will make significant headway.
The possibilities are more favourable against the CAD. I tried shorting the CAD against the USD three times last week to no avail but I think in a straight competition between USD data and CAD data, the former will win. The current level does look interesting but it looked interesting a couple of hundred pips higher too. I will hold off for now.
The EURUSD, as said already, looks more interesting. The upside is probably less but I think it is a better trade with more long-term potential. The above conclusions still stand though.
The GBPUSD, as said already, is a short. The lack of GBP data will really hinder this pair as we hear all about the strength of the U.S. economy.
Finally, the USDJPY could be a good buy. The JPY just has far less momentum. I tried going long last week but was blown out. This level isn’t quite right and we should wait for a better entry. I do expect some significant strength from the USD, although I am not sure how much.
AUD/CAD: I am going to run through these together not because they are unimportant but because I have gone over my views already. Both showed tremendous strength in the week. I feel that strength in both cases is unjustified but far more so in the case of CAD. I expect that this week’s data will really undermine the currency.
Both currencies showed major strength against the JPY. The strength of the CAD was particularly noted. To me, this suggests that the carry trade is back on. I think this makes sense in the case of the AUD but not for the CAD. Yes, we are the towards the bottom of this range but I just can’t see how this makes sense. I would look at shorting the 94 level, this cross really isn’t a major priority though.
The AUDCAD is quite interesting as both are showing strength but I believe strength is justified in only one case. The result was that this cross was largely rangebound through the week. We aren’t sitting at a completely terrible level either so this could be a very interesting buy. I am not inclined to take this on due to other positions but it is an interesting way to short the CAD.
JPY: As already stated, I am interested in the USDJPY just probably not as this level and I think the weakness against the AUD and CAD was interesting. I have no real interest beyond this really. If I had a different view on the GBP or EUR the JPY crosses might be interesting but I don’t so they aren’t.
NZD: I have saved the best to last, the NZD is probably the strongest currency in the world and is a bit less volatile than the AUD. Against the USD we are approaching highs and we are just off highs against the AUD. I have no real view either way but these are the two crosses that I am watching.
Summary: Focus this week will most likely be on the EUR but I think that reversal in the strength of the CAD and GBP are interesting trends that will also become apparent this week. The USD should show more strength with a more favourable set of data releases upcoming and this should drive gains against the CAD and GBP. Another way to play CAD weakness would be against the AUD. The AUD is potentially overvalued but I am going to hold my position in that currency against the EUR for this week, largely because the RBA is unlikely to surprise. Switching this into a EURUSD short would be another option though.
The EUR has shown strength this morning after CPI data with more important numbers through the week. Traders are taking this opportunity to squeeze bears as the CPI wasn’t as bad as expected, although it certainly wasn’t particularly good either. It is going to take more than this to really turn the trend though, EURAUD will hopefully offset some losses with the AUD rate decision overnight. German unemployment and, more importantly, the ECB rate decision are still to come.
The GBP has also found a bit of strength too, possibly on a decent set of mortgage approval/lending numbers, but has been unable to break higher. Carney’s speech today may mix things up, as always it is impossible to tell.
USD, amongst others, found major strength against the JPY on weak IP numbers. The break of the 104 level is significant and traders should keep an eye as the week develops. I don’t think we are at good levels to get involved today, we are in the middle of a big channel. We should look for retracements though. Yellen is also speaking today.
The USDCAD rallied up into the close on Friday and has held this level so far. I am tempted by this level as it looks well supported but my recent experience still suggests that AUDCAD would be a better option, if I am going to make a move. Important CAD data will be out shortly and on Friday. I am not going to try anything into the unemployment numbers so I will just sit this round out.
Finally, the AUD has showed little movement apart from weakening against the EUR and GBP. With little news it seems likely that the currency will drawn by moves in other currencies. In some cases, such as CAD, this is quite favourable. In others, such as USD, I would think less so. The EUR has obviously gained significantly, I am going to hold my position here. I don’t think we have broke trend but I think we have to be alert.
Chart of the Day: USDJPY 4h
The most interesting move yesterday was in the USDJPY, I bought on the retracement to 103 and we are now sitting at intermediate highs. I have been trying to buy the dollar against everything and have been too early every time. The JPY is really a preferred short and recent news (IP, Tankan survey, PMI, and imposition of the consumption tax from today) seems to be all moving in our direction. The Yellen speech was a bit of a surprise for the market but I don’t think it was really inconsistent with the last Fed meeting.
The AUD has also been showing weakness, the RBA rate decision seems to have been as expected but the comments about the high AUD resurfaced. The AUD rallied off the last Stevens speech simply because he stopped talking about the value of the AUD, it is now clear that they are still watching the currency. The market really wants to buy AUD and I don’t think the RBA can talk the currency down significantly, at best we are just going to stay around here for a bit.
This presents an interesting opportunity. If the RBA is going to try and keep the currency here then we have a one-way bet on AUD devaluation. The question is really whether the RBA can actually keep a lid on things. I am going to think about this more but given my long-term bearish view on AUD this is a trade to consider.
I am still short the EURAUD, this pair has clearly lost its momentum. If we break 1.4950 convincingly I will reconsider this position.
News out of CAD was quite strong but it seems that the market has really pre-empted this and the move was quite muted. I don’t really have an opinion on anything here but as the market moved in anticipation we seem to be basically flat across the market. The USDCAD has found a level finally, I continue to watch AUDCAD (although I am now a bit more cautious after the RBA meeting). The moves in the CADJPY were also very interesting, when you see this kind of volatility you know that people are putting on carry trades. As mentioned previously, this seems like a very poor trade.
The GBP found some strength yesterday breaking a level in GBPUSD but has given back these gains with a poor Manufacturing PMI. I closed out my GBPUSD short on the break of resistance yesterday. I am regretting this as we head back down but this trade really isn’t working out how I expected. I think I need to develop my views on the GBP a bit more. Anything above 1.68 still seems totally implausible but I am not sure about the downside. Either way, there are probably better places to enter from.
Finally, the EUR, the main currency in the spotlight this week. Attention is now focused on the upcoming ECB rate decision. Yesterday’s data showed that inflation in the Eurozone was very low, although unemployment data today was a bit more favourable. As most other currencies have faded, the EUR has shown some strength today, especially against the GBP and AUD, but has movement against the dollar has been quite minimal. I am not sure if I should be surprised by this.
It is hard to work out what the market is actually expecting on Thursday. The data is showing that the economy in the Eurozone is weakening and markets seem to hope that the ECB will ease policy. However, given the lack of easing so far, the consensus is clearly that there will be no policy change. This kind of discontinuity can arises frequently. The people who write about markets are not the people who make the market move.
Looking at the EURUSD, I am saying that the market is betting on easing and I think the market will be disappointed. The USD will naturally strengthen over EUR in the long-term but the momentum appears to be going the other way for now.
Open positions are long USDJPY and short EURAUD. The USD ISM Manufacturing PMI will the big data point of the day.
Chart of the Day: EURAUD H4
Major news today is USD ADP Non-farm Employment. On average, the USD looks unchanged. I think expectations are high and the market is looking for more positive news to buy into. The USDJPY has done well, I think this was more a technical move than anything else, hopefully the data will give this position some more momentum. I expect a retrace now, maybe into the ~103.30 area. As usual, I am going to be watching this action closely and may move my stop based on what happens.
GBP Construction PMIs were below forecast but the £ has rallied overall on the day anyway. The overall reading is 62.5 which is still very strong so I am not totally surprised that the market hasn’t reacted badly. I still see no case for GBPUSD above these levels but I am growing cautious as we have held the 1.66 better than expected. I am also starting to wonder whether GBPUSD could trade down massively either. The conclusion from this week will surely be that USD continues to move in the right direction, the downside for GBP is limited by the fact that hiking will come sooner and the fact that the economy is continuing to just churn forward without picking up pace. Significantly lower GBPUSD would require, I think, a clear negative turn.
In the EUR, Spanish unemployment data beat estimates but the big question is still the ECB rate decision. As mentioned yesterday, markets appear to be unsure about what they really want. The market still seems to be positioned for easing but it is clear that traders are trying to squeeze the shorts too. It seems unlikely that the ECB will really fulfil the market’s expectations here. The data is weak but not weak enough and whilst there has been some talk from ECB board members about QE, this just isn’t likely at this stage. Fundamentals indicate that EURUSD should trade down longer down but this isn’t a good time to try. EURAUD is still preferred given the momentum with AUD and the fact that traders are chopping EURUSD about and running stops.
AUD has clearly lost momentum failing on the test of highs against the USD - due to the rhetoric about AUD strength from the RBA mentioned yesterday - and is now sitting at the low of the range. I am still willing to go against my long-term view here. I see the loss of momentum as related to the lack of news. I expect the trend to continue in EURAUD over time. The movement has been fairly orderly so I think it is quite straightforward to control risk here too.
CAD has also lost momentum but is showing far more strength than AUD. I am still puzzled by this and am thinking about going long either the USDCAD or AUDCAD. Selling CADJPY would be another option, this would hedge our short JPY position and give some synthetic USDCAD exposure. I feel uneasy about doubling up my exposure to AUD so something like this would probably be a better choice. However, as we have USD and CAD with big news on Friday I am going to try buying some more USDCAD. The market has really been squeezing CAD shorts but I think this is a nice level to try again.
Finally, there was an interesting move in NZD. Bulls seem to have given up on the failure to break the high which has led to some serious capitulation. I am going to keep an eye on this as it could present something interesting.
Chart of the Day: EURAUD 4hr (really nice bearish engulfing)
Today we have the ECB meeting. Interest rate markets are pricing a 3.8% chance of a cut. I think foreign exchange markets are looking for some action but won’t get it. I expect that Draghi’s speech later in the day will be more interesting and I am looking forward to see what comes up. PMI and retail sales data was also released today, I don’t think either are of real consequence given events later.
My exposure to the EUR is through my short EURAUD position. The AUD has been bouncing around unenthusiastically and looks like it is starting to fade against the USD, possibly on weak retail sales data. Stevens, RBA governor, spoke overnight but the speech didn’t focus on anything particularly relevant for markets. As the market has taken a pause, sentiment on the AUD has shifted.
These views are more in line with my own but I am still going to hold onto the EURAUD position. We haven’t broken any technical levels and the EUR is looking weak, although the downside probably isn’t huge at the moment. I don’t really see a better option either, EURUSD is chopping badly and it is just too hard to control risk. EURNZD is a better option but I need to familiarize myself more with the economy (for example, exposure to Australia). It is clear that traders are trying to squeeze shorts though, the recent move up in EURNZD is just totally unjustified by fundamentals.
It is also interesting to note that the IMF MD tried to pre-empt the ECB meeting and suggested that Europe needs to cut interest rates. I don’t really think that the ECB cares too much what the IMF thinks but it is interesting that the IMF attempted to do this at all.
The GBP has also finally slipped below the 1.66 level on weak services PMI data. Any data on the service sector is important as the UK is largely a service-based economy. The slow growth in productivity after the recession has been placed at the door of this side of the economy. Construction, particularly residential, has done very well (as was seen earlier this week) but this data point clearly indicates a two-speed recovery. Interestingly, Carney identified this an interview yesterday pledging that interest rates would not rise until employment had recovered in the North of the UK. The residential construction boom has been focused in the South. This could be very interesting down the line, the London property market is very hot already. Waiting longer to raise rates will just stoke this fire further. Regardless, that is a problem for tomorrow and today I am going to look to re-enter short on a retrace to 1.66.
USDCAD continues to grind up against support. Usually, this would be a very bad sign but I suspect that we are just marking time until Friday when major news for both currencies comes out. CAD shorts have been squeezed badly here and I think this move is just totally unjustified by fundamentals and that we should be trading a few hundred points higher. I don’t think we are going to get a squeeze the other way but I expect that we will grind higher eventually.
I am quite happy to hold USDCAD. Shorting CAD against any other currency really doesn’t make sense at the moment. The 1.1000 level has been better supported than I expected so I am going to move my stop up a bit here.
I have mentioned the NZD briefly already, I just want to say again that opportunities are cropping up. The currency has been squeezed across the board after failing to break out against the USD. This kind of thing happens in currency markets but doesn’t really make sense. Fundamentals are unchanged, if anything NZD has improved against other currencies that is has slipped against. I am probably not going to add anything here as I tend to take my time in understanding a trade but I am sure that there is money to be made here.
Not much to really say about the JPY. News in other currencies will continue to drive movements and I think the USDJPY still looks strong.
Chart of the Day: USDCAD H4
The big news today is NFP. Markets expect to see more improvement in the US economy with the unemployment rate falling to 6.6% and NFP increasing 200k. With my USDCAD position I am also watching the CAD employment data which reports at the same time. Given that USDCAD hasn’t moved I still think this is an interesting trade. We know that there will be a big move either way.
The big news yesterday was the EUR rate decision. The consensus proved correct and there was no change. As expected, Draghi tried hard to talk up the possibility of QE and talk down the EUR noting the effect the currency’s strength was having on price stability.
Draghi has had huge success in moving markets. “Whatever it takes” famously saved the Eurozone in 2012. Talk has worked again as the EUR went down on command. There is the possibility that it will be less effective this time though. At the moment, it looks Draghi is buying time, hoping that inflation picks up in the future and that he won’t have to use QE. The market, judging by the strength of EURUSD, believes him. If deflation were to continue, not impossible given the weakness of periphery economies, then Draghi will have to back up this talk with action. The markets are less sure what action would mean but they are going to hold him to his word. QE would drastically weaken the EUR. Strength in the current account and European asset markets has really driven the EUR but it is now easier to see a larger downside scenario, with fairly limited upside.
My EURAUD short worked nicely as resistance held but I am going to be looking for something else. The EURNZD looks interesting but I am not confident with the levels that is trading at (in other words, I am not sure that I won’t get stopped out quickly). I have opened a half size position with a wide stop. I should say that this trade breaks all the rules about levels (I am going short right at the bottom of the channel) but I just think this is a good trade fundamentally.
The GBP dropped off the 1.66 level, as expected, and I got my order in. The market appears to be paying more attention now to the Britain’s current account deficit. I don’t keep myself updated with every economic indicator, 5% is a very large number though. The 1.66 level is very significant but I wouldn’t be surprised if this was broken again, even in a bearish scenario. I was able to get with a very tight stop though which mitigates some of this risk by offering a very good R:R.
The AUD has continued to languish. As mentioned previously, other currencies have really taken the spotlight this weak. I am happy to be long for now against the EUR but the upside in this trade would be far greater elsewhere. AUDUSD also looks very weak, support was faked out earlier on but it looks like there is really very little strength to follow through.
The JPY hasn’t really been in focus but the long USDJPY position will clearly be active today.
I am now open in four positions which is the near maximum that is wise when you are only trading the number of currencies I am.
Chart of the Day: EURNZD Daily
EUR: The ECB meeting was the focus of attention and expectations were met with no change in interest rates and a dovish tone from Draghi. Nonetheless, EUR sold off. I stuck with my AUD short which was, despite the weakness of the AUD through the week, the right decision as the EURUSD swung around wildly. The biggest move was in the EURCAD, the CAD continues to defy all expectations, and EURGBP was rangebound, as expected.
In the coming week, news flow is much lighter and I expect that movements will be largely guided by news in other currencies. This should be bad news across the board for the EUR.
I am short both the EURAUD and EURNZD, the latter is a half size position taken largely on technicals and gut feeling more than anything else. The news flow for AUD is particularly strong this week but I am expecting strong movement in both, the latter due to the strength of the NZD fall last week.
GBP: The GBP was light on news last week and was largely driven by news in other pairs. The GBPUSD held up well all week but did break 1.66 and I went short on a retrace as expected. However, it is difficult to be particularly enthusiastic given how well the currency held up last week. I don’t see the currency trading well above 1.66 but I don’t see it trading significantly below either.
This week we have GBP Manufacturing Production on Monday and the BOE rate decision on Thursday. I am short the GBPUSD and in the USD we have FOMC minutes on Wednesday and Consumer Sentiment on Friday, as well as the usual Fed speeches. The news for GBP is much heavier (I expect the focus this week will be the GBP and AUD) so I expect this to really drive trading.
As usual, I am not really too sure what could happen. I think data has been mixed, some areas of the economy are clearly doing well, others are not. On the one hand, London is doing well but Carney has made clear that he doesn’t plan to raise rates until everywhere is up to speed. Areas outside of London really haven’t grown under their own speed for a long time, achieving growth here will be a lot harder.
The expectation is that the BOE won’t change course, rates will be raised half way through next year. The data so far does support this conclusion, despite what I think above. In particular, labour market surveys show tightening labour markets which is really critical as productivity/wage growth is critical to recovery in the UK. However, the current account shows serious weakness and suggests that the economy can’t sustain the GBP as this level. I expect no change but some commentary on the current account from the BOE.
The reason why I think it is worth staying short the GBP is that we are getting a really good level. Growth in the U.S. is strong and so the worst case scenario is that we chop around this level. Of course, we have to be careful not to overtrade but I think we are getting a nice R:R given the limited upside to GBPUSD.
CAD: Momentum in the CAD really shifted this week. The week opened with an almighty CAD short squeeze that I got caught up in and closed with more CAD buying as CAD unemployment figures came out better than expected.
Fundamentally, I still think that the USD is in a lot stronger position than the CAD. I was long the USDCAD into the jobs numbers, it was a great spot and I got stopped out quickly but it was a loss that I would take all day.
This week will be much quieter with the only major piece of news being CAD Building Permits on Tuesday. The CAD is throwing up tempting patterns against the JPY and NZD but I am not inclined to take a shot at either. The fact these currencies are, respectively, the weakest and the strongest but both throwing up the same pattern is suspicious.
Regardless, it will be interesting to see what happens. I would guess that we see momentum slow across the board and we see a real turn against the AUD.
AUD: The AUD slowed way down last week, there was a rate decision but nothing unexpected happened and the other currencies, especially CAD, stole the limelight. I continue to be short the EURAUD but sold the AUDUSD late on Friday.
Given the heavy AUD news flow this week I wondered about the wisdom of this move from the start. However, I never really wanted to own AUD in the first place and I think I got a great level. If the AUD does do well, I get blown out quickly but make more back on the EUR side. If AUD doesn’t do well, I make money on the USD side and probably don’t lose as much on the EUR side. The danger is that something weird happens to either the EUR or USD side, like the EUR appreciating, but I am happy to take this risk. When hedges like this come up, it is a good idea to take them.
The news flow is heavy with AUD Business Confidence on Tuesday or Employment on Thursday. I don’t think I am really positioned either way for this news, we should make money either way (famous last words), but I still remain long-term bearish. The AUD economy isn’t going to break tomorrow though so this view is irrelevant for now.
JPY: News for JPY was light last week so we saw big moves in the CAD, USD, and EUR crosses which all reported important data. I was long the USD from 93 which was a bit of a nightmare, the USD had rallied hard coming into the jobs report and then got blown to pieces when the numbers were a little light. I am still holding this position but will be monitoring closely.
When important news comes out on Friday it is hard to see how the market is going to settle so it makes adjusting mid-trade particularly difficult. In other words, if this goes bad (gets worse), I am probably going to take a loss.
News for the JPY is heavier this week which should throw a further spanner in the works. Current Account on Monday, BOJ Rate decision on Tuesday, and even Machinery Orders on Wednesday should move the market. I have no idea about what could happen. Obviously, the consumption tax was implemented last week and industrial production was a little light. I also don’t really have a clue whether the BOJ would attempt any move so soon after the consumption tax was implemented, probably not. I expect the 103 level to get tested hard but I don’t see any scope for surprises and FOMC minutes/Consumer Sentiment in the US could work in our favour a bit. As stated already, I am watching the CADJPY a bit too although I am unlikely to do much here.
I should also admit that I should actually be paying better attention to the other JPY crosses. My view has been that the USD is the strongest currency so I have been focusing on this cross but we are seeing interesting levels across the board. The technicals suggest that the JPY will rally strongly next week. I don’t the technicals will be correct but it is worth observing their suggestion.
NZD: As stated already, I am short EURNZD. News flow isn’t really heavy for either currency and this trade is really just me expecting that we will move back into line after last week’s weird moves in the NZD. The weakness was all selling due to the failure to break to highs on NZDUSD, the fundmentals have changed so we should take the opportunity to sell the weakest currency (EUR) and the buy the strongest one (NZD).
USD: News out of the USD was disappointing but the data still suggests strong growth. I see no real reason to change my views and I am still surprised at the strength of other currencies.
With FOMC Minutes and Consumer Sentiment I see some scope for news to play a role but, given my exposure to GBP, JPY, and AUD, it seems likely that news elsewhere will drive my results. This probably isn’t going to be too favourable as I have suggested already but I am happy to take the risk.
As a point of general interest, it is worth watching out for the G20/IMF meetings this Friday and Saturday. Very little happens in these meetings most of the time but it is important to note what gets mentioned. I believe that USD weakness will be a concern. Several policy makers have noted high exchange rates and it is clearly having an effect on economic performance in EUR. Again, nothing significant is likely to happen but the interference of the IMF into the ECB rate decision in such a public way shows that tension is building.
As news was quite light today and I had commented late last night I thought it would be pointless to really comment earlier. We still haven’t had many interesting moves.
The big news today was German IP. This was a bit stronger than expected so we got a EUR rally against some of today’s weaker currencies. The AUD in particular showed a lot of weakness, this was unsurprising as it showed a lot of strength last week. Of course, the loss here was offset by short in AUDUSD. The rally in EURNZD was a bit more restrained as expected, we are short here too.
JPY Leading Indicators was a bit below forecast but the JPY was generally pretty strong today I think. As mentioned in the last post, we have reached an interesting spot in the yen crosses. This is obviously driven by the upcoming BOJ news but we should also consider trading flow. Yen was heavily shorted into the back of last week and there is, inevitably in foreign exchange markets, some pushback here as people take off risk. The move against USD has been most dramatic, my thinking is that the 103 level is significant and should hold if we are going to get a sustained move higher.
I decided to close out the GBPUSD short. I have lost my nerve with this trade. I really don’t like the way that the 1.66 level keeps breaking and I am just going to take the 5bps loss and see what happens. I feel I still want to be short GBP but this isn’t a good level. The aim should be to place a stop at the point where your fundamental thesis is invalidated, this is clearly above 1.68. We may be able to get another point below this level when the technicals are good but we are just going to get chopped to pieces here.
More broadly, I am thinking that this isn’t the right time for a USD long. The failure of USDCAD to rally through the 1.11 level is highly significant in my view. I am happy to keep my USDJPY position, the JPY is weaker than other currencies fundamentally, and the AUDUSD position, this is more of a hedge. I think the market is pricing in later hiking than the Fed is projecting, I continue to think this view is incorrect. It is clear though that there are other factors in play. For example, the EUR is clearly benefiting from strong investment flows. It is always hard to work out what the effect of capital movements will be but US interest rates are clearly too low to really interest markets. The resurgence of emerging market currencies after their wobble earlier this year is clear evidence of the weakness of the USD.
Chart of the Day: USDJPY H4
The weakness of the USD has come back to bite me again and the strength of the EUR meant that my AUD hedge fell apart completely as well.
The big news should have been the BOJ but this was actually pretty uneventful. Kuroda was definitely quite positive though which seems to have driven the JPY higher breaking 103 against the USD. Clearly, I was wrong on both the importance of this level and the indication of JPY against other currencies (particularly the EUR).
The bigger surprise was growth in industrial in the UK which sent the GBP surging higher. Luckily I was out of the GBPUSD and saved myself a further 15bps loss.
The EUR is also up strongly. I don’t really think any news in particular is driving this, we are getting another short squeeze. However, the EURNZD is moving lower as is the EURAUD.
Unfortunately, the move lower in EURAUD is not enough to offset the loss in AUDUSD. I had a really tight stop in the latter so I don’t think it was a total disaster but I continue to be on the wrong side of the market expecting USD strength. Again, there has been no major news for the AUD. This is very very significant as we have broken a major level on no news. We may break down below but this is a sign of significant strength.
Finally, the CAD has naturally shown strength against the USD too. There is some significant news out of the CAD housing market later but the weakness of the USD is probably driving this more.
So I clearly need to rethink my fundamental position here. I am going to keep looking at the USDJPY because I think the JPY is still fundamentally weak but the USD long isn’t going to work here. Traders should also consider what is happening in equity markets. In some sections of the market, there has been a considerable sell-off but the evidence from foreign exchange markets is mixed. Is the JPY acting as a risk-off currency? Why has AUD broken to new highs? At the moment, I am quite confused about what the market is indicating. At these times it is best just to retreat and see what happens.
Chart of the Day: EURUSD H4
Yesterday was a bloodbath for my book. My long USD position got slaughtered in every area. Part of this was poor positioning (GBPUSD), part of this was a hedge (AUDUSD), and the final part was, in my view, unjustified by fundamentals (USDJPY).
The move in USD, GBPUSD in particular, has forced me to reconsider my fundamental views. Trying to short either the AUD or CAD is clearly a bad move at the moment. Both currencies are hot and whilst I think that any increase in the dollar will lead to problems for them, I just don’t think we are getting a good trade. I am now far less keen to take a shot against GBPUSD. Unfortunately, the market hasn’t really given time for me to think this through as much as I would like. I continue to think that we won’t move above 1.68 but I think the GBP is going to be well supported whenever we do move below. Going short would be a poor R:R trade.
The best options I think are USDJPY and EURUSD. Of the two, I would pick the former. With the EUR, there is still some uncertainty about how QE would affect the currency. In addition, capital flows, as well as falling US government bond rates, have supported the currency making it hard to actually pick a good spot without getting chopped out. The USDJPY moved strongly through the 103 level yesterday but the fundamental case is still intact and is far less complex (I hope).
Today, the major news item is the FOMC minutes. The main point of interest is going to be the rhetoric around when rates will rise. Yellen went from hawk to dove in her most recent speeches, I think this was just to do with the audience she was speaking to but it has attracted attention. The NZD Manufacturing Index and JPY Core Machinery Orders are also out today, both will be important given that both currencies are at important levels.
So far, this isn’t really much to report. Yesterday was so busy that markets seem to be taking a break. I expect that we will get more movement later but I really have no idea which direction it will take.
A few currencies are at important levels. The NZDUSD is back at highs, as we saw earlier this week any failure will lead to selling across the board. My trade in EURNZD was technical so I really have no position. I could take my profit here but I like to run my gains so I am just going to hope we break, the NZD looks like the strongest major so why not. The CAD has moved right to the bottom of the range, ~1.09, against the USD. I still think this doesn’t make sense. I should held my ammunition until this point, I didn’t so I don’t think I can really try this. As said above, it makes more sense just to go elsewhere. EURUSD is at the 1.38 level, Given how choppy the currency has been it is really hard to tell if this is actually a decent level or not.
Overall, I continue to hold the EURNZD and EURAUD short. We are now holding quite a correlated position, I would buy EURJPY but I just think that this might just overcomplicate things with the news in JPY coming out tonight. Otherwise, I think it makes sense to wait and see what will happen after yesterday’s drama.
Chart of the Day: EURUSD D
