Price Action Requires Lower Time Frame Analysis
While my approach to FX
tends to be based on a combination of technical and macro-analysis
that results in trades that last several days, the current market is simply not
allowing for that. Establishing positions currently subjects one to some pretty
dramatic equity swings. The market is not interested in drawing lines in the
sand currently, rather it is interested in price discovery based purely on
momentum and economic data reports.
This of course is typical for any market, traders
take center stage in this scenario as they have little regard for why something
is moving. Currently this is the best approach. Nonetheless, some
understanding of the reasons behind some of the better positioned short-term
trades always adds a degree of conviction on top of the technical back-drop.
First let’s review the technical backdrop of the
Dollar Index, which of course will dictate price action in EUR, GBP, AUD etc.
etc.
Dollar Index:
The rapid decline from the highs set just over a
week ago reflect just how undecided the marketplace is. For now, the twin
deficits in the US are back in focus and adding to pressure on the dollar. Two
weeks ago, the contraction of yield spreads due to higher US rates was the
argument for higher levels. Currently, the dollar is at a critical levels, see
chart below.
Given that our immediate outlook is for a weaker
dollar, we see long positions in the following as logical. However, these will
require some nimbleness as they will be more of a reaction to a weak dollar than
some fundamental shift to wanting to own them for any extended period.
GBP/USD puts
in a solid recovery after yesterday’s weakness, looking to re-test 1.8977 but
1.8952 will stand in its’ way first. Internal indicators like stochastics, RSI
etc are neutral at present, with OBV not confirming latest leg higher. Support
is seen at 1.8875-95
EUR/USD able
to break above 1.3065 and now is looking towards 1.3100 but price action is
labored and erratic, absent a break in the dollar, we are neutral for
now. Pull-back towards 1.3065 and 1.3040 is likely if 1.3100 cannot be breached
in next several hours.
AUD/USD With
RBA McFarlane speaking on Friday regarding rate policies, it still seems that
.7900, regardless of corporate offers and option players posting solid offers
that has kept an upside break at bay for several days now, is still likely to
fall. We are now flat from our long in AUD/USD with solid gains, and are looking
to re-establish longs. The move back above .7870 earlier today put this one
back on our radar screen
As we head into the US holiday weekend, look for
some position squaring and risk aversion trades being established given the
recent tensions in Iran and North Korea. Look for some interest in EUR/CHF and
CHF/JPY as opposed to USD/CHF since dollar is on the defensive.
As always, feel free to send me your comments and
questions.