Tag Archives: USD

Cable near three-week low

Every day we spin the wheel. Pick one of the PIIGS and pick one of the four following problems: banks, bonds, politics, ratings.

One day it’s Greece and politics, the next it’s Italy and bonds. The news is never positive; just bad or good enough to spark a short squeeze.

I’m generally a trend-following trader and after two weeks of nasty, directionless gyrations, I’m frustrated.

But there may finally be some clarity. I’m closely watching cable right now. The October rebound cleared but failed to close above the 61.8% retracement of the September fall. Now, we are testing the low end of the range and a break may be imminent.

It’s doubtful that I will trade a potential break of 1.5868. Ideally we will get a close below that level and perhaps a weekly close below 1.5820. That would give be the confidence to sell GBP/USD.

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Quiet day favours further risk appetite

I have to score the ho-hum day in markets on Friday as a win for the bulls. I expected a further pullback in risk sentiment, especially with the soft Italian bond auction. My feeling is that this means EUR/USD is on its way to 1.44 and USD/CAD down to 0.9800.

I live blogged all day Friday at ForexLive so some expanded thoughts are there. My end-of-day comments are at Intermarket Strategy.

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Taking Stock, Looking to Buy USD

Today marks one month since The New Crisis started. It’s a good time to reflect and flesh out some thoughts on markets and where we’re heading. The lone trading position we’re holding is a long AUD/CAD position. He sold half of it for a 150 pip profit earlier in the week and we’re holding the other half, expecting it to go to 1.05 (spot is at 1.0348, about 50 pips higher than our entry point).

We planned to post far more trading tips here over the past month but it has been such a fast, emotional market that there haven’t been the clear trends and signals that I’m looking for. We blogged about GBP/USD for several days but the elements never aligned for us and we stayed on the sidelines. At the moment, we are thinking about jumping in on the short side.   First, let’s talk about the past month. Thinking about that time, the events that pop into my head the most quickly are:

  1. The debt ceiling debate
  2. The S&P downgrade
  3. Q2 GDP and the revision to +0.4%
  4. The Philly Fed falling to -30.4
  5. Consumer sentiment (Reuters/U Mich) falling
  6. The volatility
  7. The run/retreat in gold

 

So what has changed?

The clear casualty has been confidence. It’s hard to believe all those events took place in only a month because they have profoundly changed the mood in markets and the mood in the United States. Talk of a second recession is ubiquitous and in some ways, that is a self-fulfilling prophesy.

My own feeling is that the US will avoid a technical recession but the outcome will be far worse. It has long been my belief that the US is about to repeat the Japanese ‘lost decade’. Very slow growth and very low inflation for a very long time.

Given the differences in US culture, income disparity, low personal savings rate and fiscal squeeze the likelihood is that the US experience will be worse than what has occurred in Japan. On the upside, the largest multinational corporations will continue to profit from growth in emerging markets and China. Aside from gold and commodities, these are the only places to invest for the coming decade.

But this isn’t an investing blog, it’s a forex trading blog.

What’s going on now is the process of forming a top. This is most obvious in commodity currencies where you have investors still trying to pile into the carry trade only to be wiped out again. This will end badly. Commodity currencies, especially NZD, are going to be hit hardest in the coming weeks as risk unravels.

Why am I so confident that the risk rally is over?

Simply put: bonds. The fixed income market was first in the financial crisis and it’s first now. The bond traders are the smartest and best on Wall Street. If people are piling into 5-year T-notes at yields less than 1%, something very bad is about to happen in other markets. In this environment, you cannot be long stocks, risk FX or in any trade that has worked for the past two years.

Everything is about to reverse. When that happens where do you want to be? The US dollar. When the panic hits everything will need to be unwound. Traders will want to get out of every trade and the one they’re in the most is short USD.

In the month ahead, we will be looking to buy USD at attractive levels against the commodity currencies as we enter The New, Yet Unnamed, Crisis. The best money is going to be made in the early days so be prepared.

 

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Cable at Inflection Point

We are awed by the trading possibilities of the GBP/USD daily chart at the moment. We see amazing opportunities to make money long or short depending how the market breaks.

GBPUSD Aug 16

GBP/USD Daily Since Jan

Cable hit the highest since May on Tuesday but it only exceeded the prior high by one pip before slipping back below 1.6450. The area around 1.6475 has now become a critical inflection point. We see a minor bias higher because the break lower after the first two tries at 1.6474 was rejected so aggressively. What makes us hesitant to buy is the lack of follow-thru above 1.6475 on the break.

If cable does break above 1.6475 we don’t expect 1.6547 to offer much resistance. Instead, we anticipate a straightforward rally to 1.6747 and a likely test of 1.7000.

We are in no rush to jump in here. We may see a slide all the way down to 1.6325 before we get the conditions to rally. We will buy on a break above 1.6500.

Alternatively, if GBP/USD falls below 1.6300, we will sell on expectations of a move back to 1.60, or lower.

In either case, we expect to make upwards of 200 pips, so we can afford to be patient.

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July Trade Review: USD Longs (-60 pips)

USD longs versus CHF (at 80.12) and JPY (at 77.92) on July 27. Stopped out of both trades on July 29 July 29. Result: -60 pips

USDCHF trade analysis July 27
USD/CHF Hourly July 25-30
USDJPY trade analysis July 27-11
USD/JPY Hourly July 26-30

Entered with stops at 79.82 (30 pips) and 77.62 (30 pips). Greatest open loss: 30 pips. Greatest open gain: CHF +34 pips; JPY negligible

I entered this pair of trades at the same time. This was late on Wednesday, with a weekend debt ceiling deadline looming. The idea was simple: any good news about the US debt ceiling debate would lead to a pop in USD/JPY. At the same time, USD/JPY had leveled out around 0.8000 so it looked well supported.

What I should have known better: Never bet on the sanity of US politicians. They continued to bumble along until the weekend and eventually made a deal with hours to spare before the Aug. 2 deadline. Part of the reason I erred was because I believed it was necessary to have a deal before the weekend. Media reports mislead me. The lesson, I guess, it to only trade politics if you know the system inside out.

What I’m happy about: The stop was certainly in the right spot. I for 30 pips I bought myself 36 hours of negotiations. When the deal was finalized, it led to a 120 pip (JPY) and 140 pip (CHF) bounce. The rallies were about what I expected. So I took a gamble with 4×1 odds in my favour and lost on bad timing.

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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.

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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.

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USD/JPY Set for a Breakdown, Be Long AUD/USD

It’s getting more difficult to avoid insults and hyperbole when describing the debt ceiling imbroglio. Surely you haven’t stumbled here looking for a recap of the day’s news so I’ll spare you the exercise save for a few thoughts. 1) On Tuesday it actually appeared that debt ceiling talks were moving backwards. 2) the real deadline is around Aug. 15. 3) We estimate the likelihood of a downgrade from S&P, Moody’s or Fitch at 70%. 4) the US looks increasingly to be on the precipice of another recession.

We remain short USD/JPY. We booked a 120 pip profit on the first leg of the trade and we’re up 51 pips on the second leg (entered at 78.46). We’re moving our stop down to our entry on the second leg, ensuring that we’re now trading with house money. We really like this position right now and if we were a tad more greedy we would be adding to it. It looks to us like there might be a sharp breakdown below 77.75.

Our latest trade is in AUD/USD which is hovering around 1.0950. It’s going higher. Four days ago on Twitter (July 21) with AUD/USD at 1.0830, we wrote “Beautiful breakout in AUD/USD. That will be testing 1.10.” We’ve climbed 120 pips since then and we’re sure that the record of 1.1012 will fall. The catalyst is going to be a high Q2 CPI reading (above 0.8% q/q on the trimmed mean) today. We are buying AUD/USD asap with the announcement coming on Twitter via @FX_Button. We will hold it until the news turns better on debt ceiling talks.

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US Dollar Declines, Swiss Franc Rallies on Debt Ceiling

The US dollar didn’t get the walloping some expected (or would like) on Monday despite slow progress in debt ceiling talks. The one exception was the Swiss franc which shot higher across the board on risk aversion.

Two debt ceiling plans were unveiled on Monday: 1) Senate Democrats proposed $2.7 trillion in savings over 10 years with nearly half coming from defense spending cuts. 2) House Republicans called for a two-part plan that would raise the ceiling $1 trillion this year and $1.6 trillion next with even larger spending cuts. The second tranche would require $1.8 trillion in cuts to Social Security, Medicare and other entitlements.

From this it looks like tax hikes (and tax reform) are less likely. It’s seems it’s just a matter of how much to cut and where but Bill Gross’ prediction that most cuts will be fiction and swamped by lower revenues is already ringing true.

What is also becoming increasingly clear is that this will not be a long-term solution. At best the ceiling will be raised until slightly beyond the 2012 election with very little meaningful reform to entitlements or a credible plan toward a sustainable debt load. This sounds to us like precisely the type of outcome that WILL RESULT IN A DOWNGRADE. If such a deal is announced, we don’t expect a downgrade immediately but it will not be advisable to hold USD because a downgrade could be announced at any time. We will have more about the impacts of a downgrade and potential trades in the days ahead.

The dollar would like have fallen farther but the idea that AUG. 2 ISN’T THE REAL DEADLINE as taken hold. S&P said the Treasury can stretch out the process beyond Aug. 11. Others say as long as Aug. 15.

Obama is scheduled to speak at 9 p.m. ET (1 a.m. GMT). The chief risk we see here is that Obama abandons his demand that the higher ceiling runs through the 2012 elections. This would probably pave the way for the outline of a deal sometime in the subsequent 48 hours.

Outside of the huge moves in CHF on Monday the forex market was tame. JPY and CAD were mild outperformers with GBP lagging. Gold gapped $14 higher at the open, ran as high as $1621 and closed at $1614. The S&P 500 fell 0.6% to 1337.

More on the Swiss Franc Rally

USD/CHF fell as low as 0.8020 on Monday while EUR/CHF remains about 180 pips above the record low of 1.1404.

The reasons for the CHF move: 1) Over the past several weeks some large operations shifted into USD/CHF longs. They were likely stopped out. 2) Technical selling on the break below the record low of 0.8081. 3) The market is pricing in a US downgrade and when the headline hits, the place you want to be is short USD/CHF.

The collision of these three factors today caused an outsized gain in CHF. To us, this move looks like it has gone too far, too fast. Momentum indicators are stretched and consolidation looks more likely in the next few days than declines below 80.00 – especially with the risk of a debt deal.

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The Dysfunction in Washington

Many commentators and strategists are fascinated by politics. They over-evaluate decisions that will never make a pip of difference in the forex market. I steer clear of this sort of self-indulgent political pontificating because so often it morphs into a platform for whatever the strategists believes rather than what’s important to the market. At other times, the impacts will be so far off into the distance that any forex benefit will be so gradual that it’s negligible.

 

Other times, like now, even the most anti-political strategists have to give up on every other part of the market and focus on nothing but politics. The debt ceiling debate in Washington is a game-changer. Hopes for a long-term, comprehensive solution were dashed on Friday as it became abundantly clear that the Obama and the Republican-controlled House cannot work together.

 

Instead, the best hope now is to raise the debt ceiling high enough to get through the 2012 election. S&P warned that a short-term fix while piling on more debt and pushing problems down the road may lead to a downgrade.

 

When markets open on Monday, the dollar will fall as that threat inches toward reality. The US may avoid a downgrade for a year or two but it’s now inevitable. The enormous debt load combined with looming entitlements and zero appetite for tax hikes has cornered the United States. The economy is trapped in zero growth cycle that will last 10 years and Washington has neither the will nor the means to stop it.

 

The implications are obvious. The US dollar will fall and hard assets will soar. Gold going to $2000 in the near future is so obvious that it’s barely worth mentioning. The currencies that rise most against the USD will be those most tied to hard assets and least tied to US growth. The Asian, Antipodean, South American and Nordic currencies are set for a half-century of appreciation. This too was once set to be a slow, gradual climb but dysfunction like we’re seeing in Washington right now will speed up the process.

 

Our trade anticipating the fallout in Washington was initiated on Tuesday. We anticipated the problems that arose on Friday would arise earlier in the week. We entered a short USD/JPY trade at 79.21 (+69 pips) now and added to it at 78.45 (-6 pips). We will take profit on the first unit at 78.00. Our stops are at 79.00. Our trades are live if you follow on Twitter @FX_Button.

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