Currency markets have provided stellar trading opportunities this year.
It isn't always this way.
Last year was rough. False breakouts and whipsaws were the norm, as most forex pairs and crosses chopped sideways in trendless ranges.
Many of those consolidations have now resolved, as currency markets have begun to trend again. And it’s hard to find a stronger primary trend to bet against than the declining Japanese yen.
We’ve written about the yen multiple times in the past few months, pointing out that The Yen Provides the Base and joking that we could profit by simply buying Anything in Yen.
Today, we’ll follow up by outlining three tactical setups to bet on further yen weakness.
The US dollar Index $DXY is trading at fresh highs. Take a look around the currency market. It shows.
Recent attempts to fade dollar strength have failed. The euro has fallen to its lowest level since late 2002. And we’re beginning to see forex pairs experience fresh breakouts in favor of the USD.
It’s certainly not the best look for risk assets. But it’s offering us great trading opportunities, not to mention some very valuable information.
A couple of pairs that are providing both are the USD/CNH and the USD/CNY. Let’s take a look!
As I scrolled through my currency charts this weekend, the same three-word phrase kept popping to mind: "Can’t be short!"
Whether it’s the Swiss franc, the British pound, or the Thai baht, we can’t be short most global currencies against the US dollar. Not at current levels.
How funny would it be if the US Dollar Index $DXY peaked with the expectations of a 100 basis point rate hike last month?
And what would that mean for risk assets and the stock market rally?
These are just a few questions that float across my mind as I look through currency charts.
To be clear, the DXY isn't showing any signs of a top. Momentum remains in a bullish regime, and the index is holding above the upper bounds of its former range.
I’m not going out on a limb here and calling a top in the US dollar. Instead, this is all about execution and remaining receptive to all possibilities.
You probably think I say the same thing every week. That’s because I do.
Of course, I throw in a well-defined trade setup here and there, but always within the context of the dollar and its impact on the major asset classes.
It’s that important.
As the US Dollar Index rally is well underway, it’s interesting some individual USD crosses are finding resistance at historical levels of interest to both the currencies involved and risk assets!
Here’s a chart of the US dollar/Swedish krona cross zoomed out to the late 1990s:
But before you step up to the line to place your bet, you must have a plan – a set of rules rooted in risk management to guide you through your trade.
There’s no way to enter and manage a trade if you don’t know where you’re right, where you’re wrong, and where you’re taking profits. Without a plan, your strategy and philosophical approach to the markets don’t matter.
That brings us to the British pound.
Here’s a chart of the GBP/USD cross:
A few weeks ago, we outlined a short setup in the GBP/USD pair. The pound was breaking down to levels associated with the Brexit sell-off, and we wanted to ride that trend lower.
The US dollar and interest rates are still two of the most important charts out there. You’re probably tired of hearing it, but their future direction impacts the entire marketplace.
And, believe it or not, the currency market provides a great read on both.
Bullish data points continue to roll in left and right, supporting dollar strength. From the Korean won and Singaporean dollar to the euro and the pound, the dollar seems to break out against another currency every few days.
When we evaluate the trends in emerging market commodity currencies, it reveals insight into the recent rise in interest rates. Instead of showing strength, these currencies are catching lower -- which doesn’t jibe with a rising rate environment.
It’s inescapable. If you haven’t read it in the news, seen it on Twitter, or heard it from a co-worker, here’s the scoop…
The euro has tumbled to parity with the dollar for the first time in almost 20 years!
That’s the big news in the currency markets these days. Sure, it’s a significant development.
But what currency isn’t falling against the US dollar right now?
It’s an interesting question. And it draws our attention to the Canadian dollar.
Let’s take a look.
Here’s a chart of the USD/CAD cross:
While the US dollar steamrolls everything in sight and prints fresh decade-highs against most major currencies, it’s still dealing with last year’s highs against the Canadian dollar.
Yes, these crosses have been trending lower since the beginning of the year. But with the critical levels that broke yesterday, we're anticipating fresh downside legs and prolonged dollar dominance.
In almost every market environment, there are assets we want to buy and assets we want to sell. That holds even when we think the only option is to sell.
Recently, the strong buys have been in commodities and cyclical areas of the market, while bonds and the major stock indexes have sold off. That's dramatically changed in recent weeks, though.
Now, all the major asset classes – bonds, stocks, and commodities – are under pressure, as bears come for the leadership groups. It seems nothing is immune to bearish price action these days.
Despite the broad selling pressure, there's still an asset we want to buy: the US dollar. That’s right, the good old greenback! It’s one thing the bears can’t seem to crack.
If we think about it from an intermarket perspective, a defensive bid for dollars makes sense given the downside pressure on risk assets across the board. We don’t think it’s a coincidence.
Regardless, the USD is strong and shows no signs of changing anytime soon.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
Whatever we’re looking for, the market has it.
If we’re searching for large topping patterns and strong downtrends, there’s plenty to go around, especially in the bond and stock markets right now.
Some people love taking the short side, feeding on the doom and gloom narratives accompanying the selling pressure.
But if that’s not your cup of tea, plenty of markets are trending higher. If you’re more interested in assets making new highs and like buying high and selling higher, look no further than the currency market.
When it comes to forex crosses these days, it’s simple.
All we have to do is put the US dollar in the numerator or place the Japanese yen in the denominator, and we get big bases that have either broken out or are on the verge of breaking out.
It’s that easy.
We’ve highlighted the yen in recent posts, so today we’ll switch gears and focus on a couple USD crosses from northern Europe.
From the desk of Steven Strazza @Sstrazza and Ian Culley @IanCulley
King Dollar is reasserting its reign at the expense of major global currencies and risk assets.
What started as a potential failed breakout last month is proving no more than a hard retest, as the US Dollar Index $DXY broke to fresh 20-year highs yesterday.