Delicate Times In FX — Here’s Why
Delicate Times in FX
While the macro backdrop
suggests dollar bulls do not have much to go on, the charts tell a much more
coherent story. One cannot argue price action; it is what it is, and right now
the dollar is moving higher. A decent amount of dollar bears are likely causing
the lift off as they run to cover and the weekly chart of the dollar is looking
poised to break a two-year downtrend, a close at current levels (89.70) will
give the signal, technically speaking that a breakout is in force.
The Swiss Franc (CHF)
continues to bear the brunt of the selling. It would appear that
traders/investors are casting off beliefs of heightened terrorist threats even
ahead of the Republican Convention next week. The next target is 1.2860 on CHF.Â
This too is on the verge of setting a weekly breakout pattern. This is having
obvious implication on our short EUR/CHF position. While the EUR is weak, the
fact is, the CHF is more so. When we initiated this position, this was the
precise reason I decided to scale into the trade; this has proven to be a good
choice so far. A close below 1.5412 today would certainly help our cause.
For those of you who may be
interested in some macro thoughts on EUR/CHF, I have included this quote from
UBS:
The Swiss
National Bank has recently argued that rates need to rise from their current low
levels as the output gap is closing and the recovery is becoming broad-based.
UBS expects the SNB to raise rates 25bp by the Sept. 16 meeting and another 25bp
by December – this is not fully priced into the market, yet. Rising rates in
Switzerland would make short-term euro investments less attractive, helping to
push EURCHF lower – potentially to the 1.5200 area.
In the past,
EURCHF has been driven by both expected EUR-CHF rate differentials and global
growth expectations. These two indicators are significantly correlated with
moves in EURCHF spot. Regressing EURCHF with the expected yield differential and
stocks-to-bonds ratio (which rises when growth expectations rise), we find that
spot should move lower from current neutral levels. We believe that rising rates
in Switzerland should become the dominant theme, which should squeeze the
EUR-over-CHF rate premium, leading EUCHF lower.
It is becoming quite clear, that regardless
of rate differentials widening and overall economic
activity picking up relative to Europe, the recent weakness in USD/CHF is
adversely affecting our trade.
NZD/USD
Despite the solid rally in
the dollar this AM, the NZD has held in remarkably well. The yield on the
10-year bond has dropped below 4.20%, widening the rate differentials between
the US and New Zealand once again. This is likely the reason it has held firm.
Technically speaking the
50-day ema continues to be the foundation from which further long positions can
be built. I am keen on this pair and feel that there are some opportunities for
us to take advantage of the recent pullback.
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This week the RBNZ meets to
discuss and decide rate policy. The market widely anticipates and has priced in
yet another 25 bp hike. The key of course will be the jobs report here in the
states a week from today. Absent an upside surprise (needed to maintain dollar
rally) the NZD seems to have good bids behind it.
As always, feel free to send
me your comments and questions and please join me on September 9th at 1:30 PM
PDT for a FREE conference call on FX trading, simply
click here to sign up.Â