Last week was not a week that I particularly enjoyed. I was caught the wrong way with two trading positions, GBP/USD long and USD/CAD short. I had multiple small positions across the two trades and whilst my loss in $$$ was not huge my loss in pips was circa. 1,000 pips. I made the novice mistake of holding the trades a day too long when the sensible move would have been to cover and exit the trades...argh!!
US10 YR bond finally overcame the 3% resistance. So much has been made of this move and the implications of passing above 3%. What does it all mean to us as FX traders. Here are a few of my takeaways: -
- Before getting too excited. We need to see consolidation above 3%.
- This is the current psychological level. The rate has been much higher back in the day!
- Prior to the 2008 GFC, the US10YR yield was 5%.
- With yields rising this usually indicates higher interest rates.
- Higher costs for companies result. Increased borrowing costs, less money to return back to shareholders, which means equities as an asset to invest in are less attractive.
- Eventually this will affect mortgage rates and reduce personal spending power via disposable income.
From an FX perspective this should also strengthen the USD across the board and the USD index (DXY) should rise.
As always, the exception will be the USD/JPY, although it’s moves are linked somewhat to moves in US Treasuries many more factors affect the movement with the USD/JPY. For example, as it follows moves in equities as well this pair will probably strengthen, and head lower should we see US equities come under some serious selling pressure.
In addition, we enter the state of “RISK OFF”. This is where we can look at commodity currencies and the commodity currency cross-rates.
Basically, should the 10YR consolidate above 3%, it should give FX traders something that they have not had for a while, which is a directional trading environment for an extended period.
We also had an ECB (Draghi) Press Conference last Thursday. The market, myself included, were expecting a quite dovish Draghi based upon recent EUROZONE economic data. Given the fact it is well known that the ECB and exporters in the EU19 would like the weakest EUR exchange rate possible to keep their exports competitive, I thought this a no brainer, but in a rather surprising move I found Mario Draghi balanced, with both dovish and hawkish commentary.
I did note that Draghi now appears to have contracted the “Yellen disease”, everything is transitory, Draghi uses “temporary” instead when describing areas of failure of poor data contrary to objectives. We also saw references to the weather and the timing of Easter as reasons for failure. FFS next it will Christmas Day’s date of December 25thwas a surprise.
My takeaways from the ECB: -
- Was the move lower towards 1.2100 following the press conference all about EUR weakness or was it USD strength?
- I was aware of huge option strikes circa. 1.2200 it could have been those expirations that allowed the markets to bring the pair lower?
- Draghi despite recent mixed data which was probably leaning towards poor overall, was upbeat.
- Banging the drum on inflation is now getting boring and overdone. This is more like a prayer than a fact.
- Draghi emphasized downside risks mostly due to global factors but viewed them as temporary.
- No announcements re: completion of QE program.
- The “can” was kicked down the road once again and now the markets will be pressurizing the ECB for some facts on normalization in the June and July meetings.
Overall, from my perspective Draghi delivered more of the same stuff as we have heard before just re-hashed in a different order.
I do however believe he could have really sent the single currency lower, it was a great opportunity missed in my opinion, he lacked the killer instinct. There is no doubt that most, if not all, of the EU27 would have liked the EUR/USD below 1.2000.
From an FX perspective the EUR/USD, despite Draghi’s missed opportunity looks like a pair on a one-way path lower with continued USD strength. The USD despite a short correction at the end of last week into the close looks like it was just setting up trading opportunities at better entry prices.
My question is; is the USD ready to go, is it ready for liftoff back to the mid 90’s? We will have to see we had a rejection on the TRUMP trend line Friday, but this was just the first attempt. Personally, I think a great deal depends on the reaction with US 10YR yields. A break through and consolidation above 3% should see the DXY rise.
Michel Barnier was out last week stirring it up again on BREXIT: -
- Costs of exit greater for UK than the EU27.
- EU27 Businesses do NOT need City of London.
- Transition deal NOT a “done deal”.
- Market participants should prepare for no transition.
- No special privileges between UK banks and EU27.
It all inflammatory stuff probably as a result of the UK dragging its heels on the UK/IRELAND border issue and other issues surrounding the Customs Union.
The bottom line is that this talk keeps the lid on the GBP/USD currency pair, but this also affects the movements of the EUR/GBP.
If Barnier beating his chest wasn’t enough to put Theresa May in a bad mood pouring out her cornflakes at breakfast, the Friday print of Q1 2018 GDP would have soured the milk.
A miss; expected was 0.3% but actual print was 0.1%. A poor number was expected given the adverse weather in the UK during Q1. Much is being made of the fact that construction was basically closed for three weeks as the “Beast from the East” weather system gripped the UK. I have read that without the 0.21% miss on construction, the 0.3% expected figure would have been beaten.
One note of interest checking through my notes. The BOE Chief Economist Andy Haldane had forward guidance of 0.4% for UK Q1 GBP. Bet he feels like a bit of a numpty at the moment!
Nevertheless, the GBP dropped over 1% against the USD. On the news and in the hour following a 180-pip range on the day against a daily ATR of just 105 pips.
From an FX perspective the GBP is well oversold. I would do nothing for now let it consolidate.
The final noteworthy piece of news from last week, ignoring the TRUMP tweets and his bromance with the French President or Melania’s hat, was the first print of US Q1 GDP, which was a beat at 2.3% versus 2.0% expected.
The USD initially strengthened and then retreated. I put this down to a Friday with institutional traders looking to square off positions going into the weekend.
- FX - FORWARDS, BACKWARDS & SIDEWAYS:
1.1. THIS WEEKS TRADE INFORMATION: ECONOMIC DATA:
NOTE: Only the items that interest me are listed here.
1.2. THIS WEEKS TRADE INFORMATION: GEOPOLITICAL EVENTS:
1.3. BIAS CHART - USD MAJORS SUPPORT and RESISTANCE:
1.4. USD INDEX (DXY) OVERVIEW – MY THOUGHTS:
Looking at the chart below: -
- The move on Friday after the GDP data was held back at the 200 DAY SMA (Orange Line).
- The TRUMP inaugural trend line was pierced but pricing fell back to close the week below the resistance trend line.
- The 50% Fibonacci level at 91.73 is supporting price at the moment.
Moving forward I think we are destined to test the 61.8% Fibonacci retracement level at 92.56. There is so much USD momentum at the moment and we have seen a sentiment shift. Obviously, a lot depends on the USD 10YR Treasury, it really needs to consolidate above 3% to keep the DXY move higher intact.
1.5. USD MAJORS - TRADING CHARTS:
Have we had a false breakdown?
For several weeks I have been talking about quite boring sideways trading inside two range patterns on the chart below.
We have two ranges: MAROON Lines 1.2090 to 1.2550 and the BLACK Lines signify a range within a range at 1.2220 to 1.2480.
Following Draghi’s Press Conference and what I believe a huge option sale the markets took the single currency lower and this continued 24 hours later ahead of the Q1 print of US GDP.
However, rather strangely the selloff stopped, and the EUR/USD popped back above the lower MAROON trend line (Friday’s candle is circled).
We will have to wait and see into Monday’s trading this week if it was a false move or not?
What a nasty looking closing DAILY CANDLE for last week. Usually with a pig of a candle like this there are more to come. With 8 out of the last 9 days being down days one has the think how much downside is left.
From my perspective, I think that if 1.3700 is tested and gives way, we are free and clear down to 1.3500. At this level that would be a 900 pip move from the highs.
My initial thoughts are great, what an opportunity to get back in long.
A false breakdown?
We pierced though the channel supporting trend line and made lower lows but on Friday we spiked higher.
I think that as long as we are below 0.7640 this pair is bearish, in fact, if the truth be told the downtrend is not broken unless we peek back through 0.7800.
I would view any pullbacks as opportunities to sell into.
The Double Top is in play with a measured move to 0.6910. Any spikes or rips higher with this pair are in my opinion selling opportunities.
A nice rejection at 1.2900. I must admit I thought that the 2106 trend line was going to be tested circa.1.3000. So, I was both surprised and frustrated at the 1.2900 stop. I took short trades off the table just prior to 1.2900 as at the time the USD and the CAD looked very squeezy.
Am I using 1.2900 as a top from where to re-initiate shorts from?
Not yet, although I am now thinking that may have been the level to short from. I am short EUR/CAD, which I believe is the perfect foil for the CAD at the moment.
Rips are selling opportunities in my opinion given the NAFTA trade agreement. I think that a reasonable short objective longer term as the BOC will soon start raising rates is back to 1.2500.
Bugger... damn... and, well glaze my nipples and call me Rita!
We have broken free of the triangle pattern. I have been no more than a voyeur of this move higher off the 0.9195 lows.
A couple of years ago....fadó fadó.... I was always long either the USD/CHF or EUR/CHF and of late with the 1.2000 level coming close to the EUR/CHF I have backed off.
Should the EUR/USD fail to re-capture 1.2200 this pair would make an obvious choice to long if you are shorting the USD/CHF due to their inverse relationship.
I do not know what to do with this pair at the moment.
I am sorry, I have no opinion. It is on the back burner for me at the moment.
- THE WEEKLY FX PREMIUM TRADING SUMMARY:
2.1. WEEKLY FX PREMIUM PERFORMANCE YEAR TO DATE:
(Incorporating the last 5 WEEKLY FX PREMIUM TRADES)
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- TRADER EDUCATION:
No item this week.
- WEEKLY FX PREMIUM SUBSCRIBERS:
(This section is for WEEKLY FX PREMIUM ONLY)
4.1. TRADING REVIEW:
4.2. OPEN TRADES... HOW WILL I TRADE THIS WEEK:
4.3. SENTIMENT,FUNDAMENTAL & MACRO THOUGHTS:
4.3.1. OVERVIEW THOUGHTS (MY MACRO PLAN & IDEAS):
4.3.2. THE MARKET SENTIMENT CHART:
4.4. CURRENT LIVE TRADES & LIMIT ORDERS:
4.4.1. CURRENT LIVE TRADES:
4.4.2. CURRENT LIMIT ORDER TRADES:
- THE FINAL SHOT:
Nothing more to add here, I have said enough except,
Always remember longevity in Forex trading can only be achieved through trading with good RISK and MONEY MANAGEMENT, and above all set your position sizes in accordance with the size of your account and allow for some flexibility.
The Pip Accumulator
BLOG VERSION: #280 FREE NEWSLETTER
DATE: 28th April 2018