Here’s A Solid Forex Idea

I sent a note to my clients on Friday morning

indicating that I intended to remain very selective moving forward until the
current range is broken. So while this may not be a terribly exciting time in
the FX markets — observing is far better then chopping yourself up in price
action that is thin and choppy.

However, this does not mean
pack it up and head to the beach. There is some key data coming out this week
that has the potential of getting prices to move — the big one being Friday’s
payroll data. Nonetheless, let’s review some of developments we are following
so that whatever the data comes in at, we will have a game plan.

First, everything will
naturally depend on what the dollar (Dollar Index, DXC) does as it relates to
the pairs that we follow and trade — GBP/USD, AUD/USD, NZD/USD and USD/NOK. We
are of the opinion that the dollar is still within a very strong up-trend
despite the set-back last week. In fact the successful test of 89.20 on
Thursday and Friday indicates that there are buyers and a steep sell-off in the
DXC is unlikely unless there is some really negative data that comes out that
would refute current Fed policy.

We view the following levels as
being key for DXC moving forward:

90.45, 89.85, 89.40, 89.20

A break of 88.73 and 88.46
would force us to change our outlook for DXC

With other G-10 countries
looking to hold interest rates steady or cut them, the US stands out now as the
possible high yielder given that rates are expected to rise for the remainder of
the year. A solid payroll report on Friday will simply reinforce this forecast
and put a firm bid in the dollar — consensus estimates look for an increase in
payrolls of 180,000.

The currencies we are most keen
on focusing on going forward, both from a swing trading as well as a longer-term
perspective are AUD and NZD. These two have been impressive performers in the
last few years as high interest rates and rising commodity prices have provided
a perfect combination for investors. These days are numbered however, although
the charts do not fully reflect the lower levels we forecast. Currently, we are
looking for short in NZD/USD on both a swing and longer-term based analysis.
The daily chart below highlights the perfect backdrop for such trades.

In the short-term however,
selling breaks of .6790 and .6775 should yield solid gains for short-term
traders down towards the .6750 level.

From a longer-term perspective
we feel a short in NZD/CAD is a solid idea. Technically there are few reasons
to not like this trade, but also, we see interest rate differentials between the
two countries contracting going forward which should give an edge to Canada in
the weeks and months to come. Softening commodity prices moving forward —
excluding oil — also give an edge to Canada.

As always, I welcome your
questions and comments.


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