Category Archives: Forex Analysis

General forex analysis and broad market themes

July Trade Review: AUD/USD (+92 pips)

Entered AUD/USD at 1.0950 on 26 July. Exited July 26 at 1.1042. Result: +92 pips

AUDUSD trade analysis July 26
AUD/USD 30 minute, July 26

Entered with no stop. Greatest open loss: 15 pips Greatest open gain: 110 pips

Sometimes a trade that is bought minutes or hours ahead of data looks whimsical but when it’s good, it’s often because it was set-up long beforehand.

I entered this trade because I became bullish Australian dollar after the RBA minutes on July 18 (my analysis here).

I became further convinced AUD/USD was going higher due to the breakout of the triple-top at 1.0789 on July 21.

AUDUSD tweet 21 Jul
Follow @FX_Button

I was waiting for a pullback but I knew that I wanted to be long into the decision. At the same time, it was risky to be holding USD positions because of debt ceiling talks and volatility in markets so I minimized those risks by buying hours before the decision on the bottom end of the recent range.

“We’re sure that the record of 1.1012 will fall,” we wrote.

What I should have known better: If I would have thought harder and prepared better, I would have realized what the break above resistance at 1.0789 was forecasting and been ready to buy on the pullback to 1.0800. I also left some pips on the table by covering perhaps too quickly. Eco data is always somewhat unpredictable, so I should have used a stop, even though I was watching the decision.

What I’m happy about: The fundamentals and technicals aligned and I jumped at the opportunity. What’s better than that?

Share

Buy AUD Ahead of RBA Decision

Our best trades over the past month have been on Australian fundamental data so we’re going to continue to stick with what works by buying AUD/USD ahead of the RBA decision at 1.0970. That’s 110 pips below the record high and we’re expecting AUD to blow through that level by the end of the week.

I published my analysis of the RBA at ashraflaidi.com earlier today. http://tinyurl.com/3jhc7du

Let me sum up my thinking briefly:

  1. AUD/USD has broken out technically, hitting a fresh record high of 1.1080 last week.
  2. We have a pullback from the high that’s giving us a buying opportunity.
  3. We’re trading with the trend.
  4. Fundamentally, we read the RBA minutes as much more hawkish than some others and we’re going to trust our experience and knowledge.
  5. CPI was high last week and inflation is above target.
  6. Terry McCrann is a good RBA watcher and he’s overdue for a correct call.
  7. Our downside is limited. We have a 60 pip stop at 1.0910 and don’t expect it to get hit even if we’re dead wrong.
Share

July Trade Review: USD/JPY (+168 pips)

Entered USD/JPY short at 79.21 on July 4. Added July 21 at 78.49. Exited July 25 at 1.0627 (+120 pips) and July 27 (+42 pips). Result: +168 pips.

USDJPY trade analysis July 19
USD/JPY Daily July

Entered with stop at 79.56 (35 pips). Greatest open loss: zero pips Greatest open gain: ~200 pips

I entered this trade on my expectations of problems with debt ceiling talks. On July 18, we were two weeks away from Aug. 2 deadline and expectations were for a deal to get done. The trade was based on my belief that nothing gets done easily or smoothly in Washington – a trade I’ll make every day of the week.

I shared my analysis in a post entitled: Debt Ceiling Hiccups to Come Sell USD/JPY. I wrote “Every story I’ve read late on Tuesday sounds like an agreement is just a matter of hammering out some details and drafting a bill. That is NEVER the case in US politics.”

I posted via stocktwits in this post/chart

What I should have known better: If I would have held the trade until July 28, I would have made 385 pips. The time from the 24 Jul to 28 Jul was frustrating because the news kept getting worse but USD/JPY wasn’t breaking down. There was lots of talk about barriers at 78.00 and 77.75. The news was progressing exactly as I expected but the market wasn’t acting how I expected so I cleared out. I suppose that was a wise move with the first half of the trade but with the second half, I should have just moved the stop lower instead of rushing out of the trade. A bit too cautious.

What I’m happy about: Many things. First, I was never holding a loss on a trade that earned 168 pips. Second, I didn’t jump into the trade on July 18. Instead I waited for a bounce. Even though the bounce was only 15 pips but it was a good start to a very disciplined trade. Third, I added to a winning trade. Fourth, I moved my stops down all the way.

Bonus thought: Look how oversold the RSI is, I almost want to buy USD/JPY expecting a bounce in the next 2-3 days on a debt ceiling deal.

Share

July Trade Review: AUD/USD (+108 pips)

Entered AUD/USA short at 1.0735 on July 4. Exited July 18 at 1.0627. Result: +108 pips

AUD/USD daily July 2011
AUD/USD daily July 2011

Entered with stop at 1.0800 (65 pips). Greatest open loss: 54 pips Greatest open gain: 210 pips

I entered this trade ahead of the RBA decision on July 4. I expected a dovish statement and explained why in a post RBA Will Remain on the Sidelines, AUD Vulnerable  “The Australian dollar is likely to fall if policymakers do not take strong incremental steps toward future rate hikes,” I wrote. “The market is still hanging on to the idea that the RBA could hike in August but we see it as a long shot.”

I wanted to be short USD on July 18 so I exited the trade. Then the RBA minutes were more hawkish than I expected. I wrote this before exiting the trade RBA Minutes Disappoint Doves “What sounded like worries about employment and growth in the statement, read more like a simple adjusting of time frames in the minutes,” I wrote, noting that a high CPI reading late in July could put rate hikes back on the table.” Later in the month I used this perspective and I made money on AUD/USD longs.

What I should have known better: Not much. I could have booked a nicer profit on July 11 but I wasn’t prepared (see my trades in NZD/JPY and NZD/CHF for more).

What I’m happy about: This is what I do best – trades based mostly on fundamentals with some technical underpinnings. I entered the trade ahead of a fundamental event and left the trade as soon as the fundamentals changed. I also didn’t get shaken out by the nearly 300 pip rally on July 11-12.

Share

Buy USD on Debt Ceiling Resolution, RBNZ Holds

Not long ago, Geithner was pronouncing the US would never lose its top rating but now the market is in the process of pricing in a downgrade. The S&P 500 fell 2% to 1305 on Wednesday and is the process of putting in its worst weekly performance in almost a year. The consensus is that the US dollar will continue to fall but it may not be as straight-forward as advertised. A continued decline in the stock market will provide a safe-haven boost to the USD as will higher bond yields. The resulting slowdown in the US economy may also weigh more heavily on Canada with risks to the other commodity producers and the economies most tied to US consumption.

At the moment, the situation is looking dire but what’s has been lost is that DEBT CEILING NEGOTIATIONS ARE MAKING PROGRESS. Boehner is reworking his proposal and appears to have his own party on board. Reid is also looking for additional cuts in order to satisfy the dollar-for-dollar demands from Republicans. The sides now don’t appear all that far apart and we estimate a 75% probability that will we have the framework for an agreement before markets close on Friday.

This will present the opportunity for a significant relief rally in the time between the passage of the legislation and decisions about the credit rating. There’s also the distinct possibility that the ratings agencies don’t have the courage to downgrade the US. Based on this, there is room for a bounce in USD/CHF and USD/JPY — both may have stabilized and at oversold levels.

We will enter longs in both these trades ASAP. Follow @FX_Button  on Twitter for live updates

THE RBNZ HELD RATES AT 2.50% as expected and Bollard said the economy grew more strongly than expected. The central bank leader telegraphed an upcoming rate hike by saying there is little need for the 50 bps March “insurance” rate cut to remain “much longer”. The market has priced in 100 bps in hikes in the next 12 months but nothing beyond 50 bps is guaranteed. Bollard may have done a good job talking down NZD by nothing that if the currency’s strength persists, it will reduce the need for rate hikes.

Share

Looking to Buy EUR on ‘Marshall Plan’

The euro surged on news that the European bailout fund will be given the power to buy periphery debt in the secondary market. We think this is a wise move by European leaders. It will chase out shorts in the bond market and spook CDS buyers. We anticipate buying to be unannounced (unlike the Fed’s QE).

 

The riskier part of the plan, which is a draft “Marshall Plan”, calls for EU investments and growth stimulation in Greece. Banks will be recapitalized with an estimated €25 billion via loans to the Greek government. The EFSF will issue loans at around 3.5% and the duration will be extended from 7.5 years to at least 15.

 

As the news leaked out, EUR/USD jumped to 1.4315 from 1.4190. Technically, it sparked an outside bullish reversal candle. The move above 1.4309 surpasses the 100-day and the 55-day moving averages.

 

At the same time, S&P said there is a 50% chance it will downgrade the US to AA in the next three months. They warned that a short-term agreement to boost the debt ceiling without a long-term deficit-cutting plan could cause the downgrade as soon as early August. Under this scenario, they see US long-term yields rising 25-50 bps with GDP growth also cut by 25-50 bps.

 

They said a failure to reach an agreement would likely shove the US economy back into recession. They think it’s possible the Treasury could delay other payments and push default beyond Aug. 11. The latest possible date they see is Aug. 15, when $62 billion in interest is payable.

Share

RBA Will Remain on the Sidelines, AUD Vulnerable

Signs of a slowdown in the Australian economy will force the Reserve Bank to hold rates unchanged on Tuesday and are making expectations of an August hike vulnerable. The Australian dollar is likely to fall if policymakers do not take strong incremental steps toward future rate hikes.

 

At 0430 GMT, all 28 economists surveyed by Bloomberg expect the RBA to leave interest rates at 4.75%. Yesterday’s unexpected drops in retail sales and inflation cemented those expectations and are cutting into the chance of an August hike.

 

May retail sales fell 0.6% compared to the 0.3% rise expected. At the same time, the Melborne Institute/TD Securities monthly inflation gauge was flat in June after a 0.2% rise in May; the annual rate fell to 2.9% from 3.3%. Building approvals also slumped 7.9%.

 

At the previous meeting, on June 6, the market had priced in a 16% chance of a hike. When it didn’t come, AUD/USD fell 60 pips to 1.6080. The pair eventually bottomed at 1.0390 on June 26 but popped back to 1.0775 during last week’s risk rally. What’s critical from a fundamental and technical perspective is that the pair has failed to close above 1.0774 — the high before June’s unexpectedly dovish RBA statement. This will be a key closing level in the day ahead.

 

The market is still hanging on to the idea that the RBA could hike in August but we see it as a long shot. We also expect the chance of a hike in August to fall to virtually nil if the RBA continues to say: “The Board judged that the current mildly restrictive stance of monetary policy remained appropriate.” The OIS market is pricing in just 15 bps of tightening in the next 12 months.

 

Given that, AUD/USD is looking rich at the moment (1.0732). Even if the RBA introduces slightly more constructive rhetoric, we think the rally will be short-lived (48 hours max). It will take a significant hawkish shift to propel AUD back toward a re-test of the all-time highs at 1.10. This would manifest itself in something like the Feb. 2010 statement which said: “The Board considers it likely that monetary policy will, over time, need to be adjusted further in order to ensure that inflation remains consistent with the target over the medium term.”

 

Share

The Bank of Canada Will Hike, Look to Buy CAD

The Canadian dollar jumped after May CPI hit the highest rate in eight years. The Canadian dollar trailed AUD and NZD despite the miss as Canadian bank economists held onto predictions of no hike at the July 19 meeting. Some continue to forecast no hikes this year, noting gas prices have been down since the report. As traders, we think the money lies in establishing longs ahead of the decision at an opportune time. First, the BOC is hyper-conscious of inflation expectations (like Trichet) and terrified of allowing them to creep up at all. Second, it’s an unpredictable central bank and will not foreshadow a hike with a code word like “strong vigilance.” Third, there is no meeting in August, so the BOC will have to wait until Sept. 7 to move and policymakers may feel that they will sleep better through the summer holidays with a pre-emptive move. The clincher may come with Thursday’s report on April GDP; a 0.1% contraction is expected. With a flat or positive reading you will see the stubborn Canadian bank economists begin to shift their tone.

 

Share