Here’s A Safe Bet…

  • June 21, 2004
  • Dave Floyd


I think it would be a safe bet to say that the June 30th
Fed meeting will keep the FX and all other major markets on hold. 
With that in mind, short-term trades, if you are compelled to trade make the
most sense at present.  Yes, we are short USD/JPY as a “position” trade, but
absent that trade, I will only be seeking short-term trades as we move towards
June 30th.  Despite shortening the time horizon, the market is still
thin and choppy, discipline and patience is what will separate winners from
losers.

Turning
back to our current position, short USD/JPY, Japan’s economy continues to
surprise to the upside, which will drive the yen higher versus the dollar.
Machine tool orders — a reliable indicator of capital spending and the yen —
surged by 55% in
May from the previous year (Chart 1).

 























*
Source:  BCA Research

 

^next^

In
addition, the much beleaguered real estate market in Japan is showing some
healthy signs.  In fact, real estate stocks are outperforming the general
market.  Historically speaking, the Yen typically outperforms the Dollar when
real estate conditions are improving and when cash earnings from real estate are
rising.  This is the case at present. 

Trades in
the Dollar based pair’s will likely be the most challenging, as monetary policy
domestically is still unclear.  The forward Fed Funds market indicates a rather
rapid rise in rates in the next year, 2.5% by January 2005, but recent comments
from the Fed contradict this.  The carry trades mentioned last week might offer
some edge; long NZD/USD is one that has appeal both from an interest rate
standpoint (positive carry) but also technically.  The AUD/USD is rather weak
technically so despite the positive rate differential, the NZD/USD would be the
better choice.

Playing
upon that same theme of the carry trade, you may want to consider looking at the
European crosses.  Rates in Europe range, highest to lowest, are as follows. 
Britain (GBP), Sweden (SEK), Euroland (EUR), Norway (NOK), and Switzerland (CHF).
 For the past week the higher yielding currencies have outperformed the lower
yielding currencies, the exception being EUR/SEK.  Based purely on rates, the
GBP/CHF makes sense as a long based on my short-term model.  Solid support at
2.2740 and a thrust above 2.2918 would serve as a logical entry point.

Beyond
that, I intend to watch patiently this week and take signals based on a
short-term model as a way to play the choppiness.  We have had some solid picks
in recent weeks so there is no need to force trades at the present time.

As
always, feel free to send me your comments and questions.


Dave