G-7 Analysis And My Strategy Going Into The Meeting
At last,
the G7 meeting upon us, while there is always the potential for it to
offer nothing new in terms of policy viewpoints, I hold out the hope that a few
key words might just set the FX markets on fire. Absent yesterday’s rally in
the dollar for both technical reasons (see chart below) as well as some
favorable comments by the man with the dollar printing press, Fed Governor Bernanke, it was a quiet week. Looking back and realizing I only published one
FX Swing Trade Alert all week, I did have to go back and review, did I miss
something? Well, I suppose depending on how you look at the charts there were
some trades, but with moving averages moving sideways most of the week, the
sidelines was a pretty safe place to be. Next week will likely be very
different.
Thanks to Todd Gordon for the
above charts. It was a good heads up not only for a counter-trend trade in the EUR, GBP and CHF, but also set the gold stocks on the move.
As of
today, I still hold just two FX Position Trades, combined, they are
slightly underwater, but are set up nicely from a technical/fundamental
standpoint.
Short EUR/JPY at 133.95, stop at 135.25
Short
EUR/AUD at 1.6297, stop at 1.6525
From a
fundamental standpoint, both of these trades are based on potential developments
from this coming weekend’s G7 meeting. So while there is solid technical
evidence for these trades, I am viewing the potential comments after G7 as a
possible catalyst for further weakness in the above mentioned pairs.
So what
are the potential comments from G7? One word: China. The US has continued to
put pressure on China to let their currency float, rather than keeping it pegged
at an artificially low level. Naturally, the politicians in China are looking
out for their best interest, jobs for their citizens. A favorable exchange rate
only makes China’s exports that much more attractive. The downside is that the
economy is beginning to overheat, which would be far worse than simply a change
in exchange rates. What is becoming clear, however, is that an upward
adjustment in China’s exchange rate may very well contribute to a sustained
global recovery.
Secondly,
since other Asian countries (mainly Japan) have also intervened heavily to keep
their currencies in line with the Renminbi (China’s currency), the Euro
has borne the brunt of the worldwide adjustment. It is quite possible that with
the saber rattling coming from the ECB and the possibility that US and Chinese
officials are working closely together ahead of the preparatory Deputies’
meeting scheduled to start this week an adjustment may be in the cards.
If there
was a revaluation of the Renminbi, the Asian currencies would rally and
the Euro would likely adjust downward. Given that Australia has not yet
indicated their dissatisfaction with a strong currency and the positive interest
rate differential between them and Euroland, this pair too would also benefit.
I will likely also go long the Yen at some point today ahead of the G7 based on
the commentary above, with a tight stop loss .
Speculation aside, these trades make sense from a technical back-drop as well,
so I am not simply hoping only for a one off event from G7.
As always, I welcome your
comments and questions. If you would like to have your email address added to
my FX Mailing List for actual trade recommendations ahead of my FX
Service through TM in mid-February; simply send me your name and
email address to: aspendave@yahoo.com.
Dave