This Short Seems Logical
Volatility, a
trader’s best friend. There can be little doubt that the volatility
witnessed in the FX market recently has been a welcome development to
beleaguered stock traders. Yes, the volatility has come at the expense of the
Dollar and the upcoming G7 meeting. Second, during
January, we have seen a significant shift in European policymakers’ stance on
EUR
strength, particularly from the German Government. And while the Dollar appears
to be enjoying a respite from the relentless selling, further downside may not
be in the cards, rather just sideways action:
“The history of the Dollar
decline since early 2002 has shown that accelerated sell-offs were followed by
multi-month periods of consolidation. During these phases of range trading,
speculative short Dollar positions were covered while simultaneously, the
fundamental – current account related – Dollar selling continued. These opposing
forces neutralized each other and led to the dominating sideways movement.
Without signs of “disorderly” capital flight out of the US currently, it is
difficult to see why this pattern should be interrupted.”
Source:Â Goldman Sachs
If you recall back to the G7
meeting in Dubai in September the comments that stated a “currencies should
float freely”, the volatility afterward was fantastic. The Yen alone provided
some great opportunities. Will this coming weekend’s G7 meeting provide more
fireworks for FX traders? I think it is entirely possible, let’s consider the
wild card, 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 that 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, the Euro has borne the brunt of the worldwide adjustment. It
is quite possible that with some saber rattling coming from the ECB and the
possibility of US and Chinese officials are working closely together ahead of
the preparatory Deputies’ meeting scheduled to start this week that either a
direct or not so direct statement may indicate a policy change within China..
If there was a
revaluation of the Renimbi, the Asian currencies would rally and the Euro would
likely adjust downward. This scenario makes a short in
EUR/JPY attractive. Given that Australia has
not yet indicated their dissatisfaction with a strong currency and the positive
interest rate differential between them and Euroland, a short in
EUR/AUDÂ seems logical.
^next^
I will likely also go
long the Yen at some point this week ahead of the G7 based on the commentary
above, I will keep you posted.
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:Â aspendave@yahoo.com.
Dave