How To Add Confidence To Your Trade
When Technicals and
Fundamentals Meet
For those of you who have been following the FX
markets over the last week or so, you know how volatile it has been. Suddenly
the sure fire bet of buying the EUR around 1.25 and selling when it arrived at
1.30-1.35 is not so sure. You can always be sure that when any market gets to
complacent about levels being achieved, it will likely be a far bumpier road to
that price. This is definitely the case right now. As usual the Dollar
Index (DXC) seems to be leading the charge. It appears that the
DXC is breaking out of its down trend which at
least from an intermediate stand point was initiated last August. As you can
see from the chart below, the move off the low has been dramatic. However, at
present the 50 EMA is proving to be formidable resistance. My guy tells me that
this level will be breached.
So now that we have framed the context in which
the FX markets currently trade, let’s examine a couple of trades I am in (as of
last night at least) that look to take advantage of this scenario.
The EUR is
the most logical currency to look at in terms of a pretty clear cut inverse
relationship to movements in the dollar. However, other technical levels also
make this short attractive. The EUR too is
on the verge of breaking its 50 EMA, in this instance, support.
The trade I like the most however is being long
the Dollar vs. the Yen (USD/JPY). Again, there are several reasons purely from
a technical standpoint that lend confirmation to this trade, but in addition, we
also have a nice macro/fundamental scenario with which to bolster the logic.
^next^
It is no surprise that the Bank of Japan (BoJ)
is heavily involved in intervening in their currency to protect it from
appreciating too rapidly at the risk of slowing down their all important export
sector. It is argued that maintaining certain values in the
JPY versus the Dollar is an ideal way to keep
their exports competitive. Despite the trillions of Yen that have been sold,
with an ever increasing amount each month it seems, the effectiveness is
beginning to wear off. Compare the two charts below, despite a massive increase
in intervention, the Yen continues to appreciate with the exception of the
thrust lower in the last few days (in this particular pair, USD/JPY, a
strengthening Yen is denoted by a downward sloping chart and vice versa).
Yes, in the last few days the
JPY has in fact depreciated against the Dollar,
but this has been more due to market forces than outright manipulation.
However, don’t you think that with the market sending the
JPY lower and the BoJ with an axe to
grind, that just maybe all the pieces are in place for a nice solid short?
While it sounds good on paper, only time will tell. I will say this though,
that type of analysis and story give me some staying power in trades like this.
As of this morning these are the current
outstanding positions:
Long:
$/JPY at 108.44
Key Levels for Today:
JPY: 108
CAD: 134.3
As always, feel free to send me your comments and
questions.