More of the Same From Forex

From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley

Consolidation and range-bound action have dominated the currency market since late last year.

While commodities and cyclical stocks -- especially energy -- continue to catch a bid, commodity-centric currencies like the Australian and Canadian dollars fail to show any definitive signs of strength.

At the same time, the US dollar isn’t doing much either, as the US Dollar Index $DXY has been chopping sideways for several months.

Long story short, indecision is the overarching theme for forex markets at the moment.

One forex pair that does an excellent job of illustrating the trendless nature of these markets is the AUD/JPY.

Here’s a chart of the AUD/JPY cross:

As you can see, the currency market’s classic risk barometer has gone nowhere for almost a year. It’s currently trading right in the middle of a wide range.

While this kind of prolonged sideways action can be frustrating, it makes sense given how bifurcated markets are right now. 

And it’s not just the AUD/JPY that looks like a mess right now. Most major developed-market currencies have been grinding sideways against the US dollar for several months now.

With commodities and cyclical stocks showing so much strength, one reason we’re watching AUD/JPY is for confirmation. But, for now, we’re not getting any.

This is true for most of our risk appetite indicators. Outside of the stocks versus bonds ratio and a handful of others, these trends are mostly range-bound, just like the AUD/JPY.

When it comes to forex markets, we’re not seeing much supporting evidence for the new highs from commodities and cyclical stocks.

Just like most things right now, the majority of currencies are a hot mess. 

Here’s a chart of the DXY to further illustrate this point:

Since resolving higher from a nice base late last year, the DXY has been chopping sideways in a continuation pattern.

Unlike the AUD/JPY, it’s only been consolidating for a few months. In that short time, we’ve already seen a failed move in both directions. 

False starts, failed moves, whipsaws, shakeouts -- you name it.

This kind of indecisive price action is characteristic of sideways markets. And it’s precisely why we prefer to trade trending markets instead of range-bound ones.

The way we want to manage around this kind of market is simple: Be patient.

Trading a range inevitably involves lower-probability setups marked by choppy price action. We prefer to ride trends

Once the primary trends transition from neutral to bullish or bearish, our chances of success will rise. We’d prefer to wait it out until that time comes.

And, from an intermarket perspective, we’re also due to get some valuable information based on which direction these ranges finally resolve in.

We’ll be sure to follow up once it happens!

As always, let us know what you think.

And be sure to download this week’s Currency Report!