Weekly FX Strategy

  • August 2, 2004
  • Dave Floyd

Weekly FX
Strategy

The close of this week also
brings a close to the month.  Most FX traders are likely glad that this is the
case.  July turned out to be a month where everyone’s detailed analysis of
events going forward were tossed out the window with a mere few words from Alan
Greenspan.  With a large contingent of dollar bears still lingering, the market
really never did get back into a groove after the sharp rally in the dollar. 

That being
said, we still must try to piece together the next course of events, it will be
tricky to say the least.  With economic data and the subsequent price reaction
seeming to defy logic, we will need to rely far more on the technicals as we
head into August.  Nonetheless, we do need to look at the data and realize that
this recent move may be being built on a foundation of sand.

The
economic numbers out of the US have been mixed lately, some good, some bad.  The
FX markets rally or sell-off depending on the data.  However, it would appear
that overall, momentum is waning.  The one statistic though that is consistent
is the nagging rise in inflation.

Friday’s
GDP report came in lower than expected, but inflation, as measured by core PCE
moves up to 2.1% from 1.8% – this is the key news.  This is what the market has
chosen to focus on; pre-emptive rate hikes.  This scenario of slowing growth
coupled with rising inflation will make for a challenging environment not only
for Fed members, but will make it difficult to map out long-term trading
strategies.  Policy and trading decisions are likely to be based as data is
released, this will add an element of volatility that shorter-term models may
benefit from.  That being said, the best course of action is to simply view the
current data for what it is, take a longer-term view from each of the currency
pairs and then incorporate short-term model signals for optimal trade execution.

USD/JPY

While
dollar bears have likely not been flushed out yet, and Yen bulls appear to be
under pressure too.  The Yen has now gone from a long to a short in a matter of
days.  Economic data from Japan confirms that the economy may well be slowing:

 

 


 

–         
operating profits
have begun to rollover, this may keep equity investors away, thereby
discouraging capital flows

–         
lower profits may
translate into weaker business sentiment, another negative for the Yen.

 

It is
interesting to note that operating profits in the most recent expansion phase
did not exceed those of the previous expansion in 1998-2000.


While I have no interest is buying the USD/JPY at current levels, a pull-back
over the next several days will offer a good long opportunity.

AUD/USD

Going back
to my thoughts regarding using short-term models for trades, I feel that the AUD/USD
offer such a set-up at present.

 While the
daily chart has begun a down-trend in recent weeks, and weekly momentum is
clearly down, and rate differentials are again looking to contract, I see a good
long opportunity at present based on a host of inputs on a short-term model. 
Look for a move higher to exhaust around .7110.

Look for
.7070-.7080 as near-term resistance.

 





 

 

EUR/GBP

Rate
differentials are likely to remain wide going forward.  Technically a short
still makes sense.  Short-term support is seen at .6585 and a target of .6477

 



 

 

Open
Positions:

 

We are
short EUR/CAD from the 1.6000 area.  Look for some near-term upside
pressure, however, tradwe remains valid with a revised target of 1.5825.

 






 

We are
also short AUD/NZD from 1.1069 and are seeking an aggressive target of 1.0775.

 






 

With a lot
of economic data out this week, it will be key to take signals from shorter-term
models.  The result will be an in crease in trade frequency and shortened trade
duration.


Dave Floyd