Forex Trading: AUD/USD and NZD/USD

NZD/USD
The Aussie and Kiwi should be interesting pairs to trade over the next couple weeks due to the increase in volatility and the current disconnect between the U.S. stock market and the U.S. Dollar. With the sequestration scheduled to come into effect tomorrow and little optimism that the Republicans and Democrats will reach a deal, it could have a positive affect for both equities and the USD.

Let's look at some charts. This is a daily chart of the NZD/USD with the 200 SMA and 200, 100, 50, & 20 EMAs. I want to draw your attention to the trendline support, which was broken slightly (which trendlines often are because muppets typically put their stop losses and sell stops below them.) Price moved right to 0.8225 (study price reaction at 00, 25, 50, 75 levels) where the 200 EMA helped provide support.  Price then rebounded to the open of the large down candle (2/26). Price often encounters new supply and demand at the opening/closing price of daily candles.

So what does this mean? The trend on the 4 hour chart is down. Trend continuation on the 4hr chart and a breakout of the channel to the downside on the daily chart is the scenario that makes the most sense to us. Remember, we've had a small break of the channel to nab the sell stops and stop losses, then a rip up to squeeze the new traders who entered with sell stops. A rip down would frustrate the most amount of traders at this point, that's why we consider it the most likely scenario.

Even though we have developed a bias, it's important to note that we are often wrong - just as all traders are. The important thing is to not get hurt badly when we're wrong and to let trades ride and make a lot of money when we're right. So what's the purpose of performing analysis when we're wrong a good deal of the time?

Dwight Eisenhower said it best, "plans are useless, but planning is everything."

If you understand the current chart and the possible scenarios, it makes it easier to adjust for the constant changes in market variables.




On to AUD/USD. We've noticed that a lot of "high profile" traders on twitter have been saying that 1.0150 is support on AUD/USD. Similarly to the situation in NZD/USD, there are probably already stop losses and sell stops accumulating below 1.0150. There will probably also be buyers at 1.0150. We think the most likely scenario is a move to 1.0150 (buyers enter), then a move lower to squeeze the buyers, trigger stop losses, and trigger sell stops. After that's done, a short move higher to squeeze the traders who entered with sell stops, and then a move lower to parity.

This is one of the most common scenarios we see played out in the market. Day after day, week after week, month after month.

Once I can pin point bids and offers on a chart and know the levels where traders should get hurt, it becomes easier for me to find entries with great risk to reward ratios.

Forex Trading: Market Update

The market was decidedly in "risk on" mode today after good economic data was released and Ben Bernanke reiterated his commitment to Quantitative Easing (QE) until the unemployment rate dropped. The uptrend in equities since March 2009 has remain intact, and bullish sentiment is still not at extreme levels. With the distance we are away from all time highs in the Dow Jones and S&P 500, we think the most likely scenario is a break to all time highs. This should trip a lot of stop limits, buy stops, and bring in more money off the sidelines. At some point there will be a correction; but unless the issue is serious enough to create the beginning of a multi-year downtrend, it will most likely be a dip, providing a good buying opportunity.

The main reason the U.S. stock market has been so well bid over the last couple of years has been QE - and Bernanke reaffirming his commitment to easing gives the bulls a green light to continuing buying. That's what matters more then the "economic realities" bears claim exist. Maybe they are right; but it doesn't matter. When it comes to the markets, price is the only reality there is.

To the FX market: there's been a notable divergence, as the U.S. Dollar Index has remained well bid in the month of February, even as equity markets have pushed higher. There are two possibilities: either the correlation between risk on/off and the U.S. Dollar is breaking down, or the break in the correlation is only temporary in which case the equity markets will soon rip down or the USD will weaken substantially. This question may be answered this Friday (March 1st) when President Obama's sequestration is scheduled to go into effect.

Sequester Update

If you're a trader who's interested in market commentary and current events, DYDD (Doing Your Due Diligence) is a website worth checking out. The following post below was written by Robert P Lehman and can be found here. You can follow bob on twitter here.

Sequester Update
Well, the days tick by and there is really little of substance to report, although the political game playing continues in SIZE. The deadline for the Sequester is March 1, 2013 and it appears that nothing will be done to avoid it. I alluded to that in the addendum to my last post on the Sequester, it appears the Republicans have concluded they can win this fight.

The Republicans efforts around the upcoming Sequester thus far have been limited to pointing to Bob Woodward’s account that Jack Lew, current nominee to become Treasury Secretary, came up with the idea of the Sequester. The beauty of the idea, supposedly, was that a Congressional Super Committee would be “forced” to come to an agreement or face painful cuts to sacred cows of the Republicans (defense department) and the Democrats (discretionary spending). According to Woodward’s book, the White House was gleeful about the “genius” of their idea. That glee has apparently diminished and the President and his acolytes, have been treating the idea like an ugly stepchild. Meanwhile, the republicans seem to delight in reiterating that the idea was the President’s to begin with.

The White House’s recent strategy is to attack, and some might say strike fear amongst the electorate regarding the impact of Sequester. A parade of Cabinet leaders have been paraded on news shows warning of the harsh consequences of allowing the Sequester to be implemented. They paint a dire picture, but hosts have frequently countered with confusion as to how the Sequester impact can possibly be severe. Political commentators have suggested that the Administration will make cuts where they can be easiest to put on television, specifically reducing staffing in certain major airports. The thought is that doing so would increase pressure of recalcitrant Republicans, but the strategy poses risks Equity markets seem largely indifferent to the debacle.

At 11th hour, Sens P. Toomey and Inofe are looking to move a bill forward to allow President special authority to allocate cuts. No idea if this comes to fruition.

Famous Quote

“All a trader needs to know to make money is to apprise conditions. The big money was not in the individual fluctuations but in the main movements that is, not in reading the tape but in sizing up the entire market and its trend. And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this:

It never was my thinking that made the big money for me. It always was my sitting.“ - Livermore

Forex Trading: GBP/USD

The GBP has been the second weakest of the major currencies recently, only being outperformed in the race to the bottom by the Yen. We recognize that the GBP is in oversold territory (RSI below 30) and realize the possibility for a corrective move higher; but we believe that both the technical and fundamental views point to a lower GBP in the medium term.

The fundamental argument can be easily supported by browsing through the last 6 months worth of GBP economic data on Forex Factory's Calendar. Once the "Olympic Effect" wore off, the GBP numbers began to miss expectations. One of the main problems in the U.K. is the punitive tax rates. This problem has decreased general competitiveness and productivity and caused an exodus of businesses and employees in the finance and banking sectors. As Zerohedge reports here, jobs have become so scarce that it's even difficult to obtain a part-time job as a coffee barista.


Technically speaking, this is a clear breakout from the triangle pattern shown below.

The .50 fib retracement drawn here on the monthly chart had held really well until we recently broke through it.

Here's a closer shot of price action (a weekly chart) with multiple bounces off of the .50 fib

On the daily chart we have a clear break from the bottom of the range (1.5660) and a resulting 580 pip drop that occurred with very little consolidation. This suggests that there's scope for consolidation even though price has been dropping quickly so far and we feel trades to the downside still offer good risk to reward ratios.

As per our previous post on the GBP/USD we've highlighted an attractive setup that we'll look to play if the GBP begins to strengthen. The key arguments for GBP strength are:

- This is a "buy the rumor, sell the news" scenario. The rumors of a downgrade started flying when GBP/USD was trading above 1.6000 and now the UK's credit rating has just been downgraded.

- If the Euro keeps selling off, then EUR/GBP should continue its descent, giving the GBP underlying strength across the board.

- The variables we consider before taking a trade are always in motion; but right now we're looking at 1.5425 and 1.5500 as attractive resistance levels to sell into GBP strength should it run the price inefficiency beginning at 1.5315

Forex Trading: GBP/USD

GBP/USD has just spiked up as the .382 fib retracement at 1.5250 held. There's a price inefficiency from 1.5315 to 1.5415 that price may move through very quickly if it breaks above the swing high of 1.5325.

GBP/USD has come down from 1.6350 to put in a fresh yearly low at 1.5130 - a move of over 1200 pips!! It has made the move down with really no corrective move and very littler consolidation, so there's plenty of scope for a bounce at these levels.

EUR/GBP is also beginning to drop along with EUR/USD (currently down 500 pips from a high of 1.3700) due to political risk & negative growth revisions. If it continues dropping it will contribute to GBP strength as the Euro is the #2 most liquid currency in the world (think of the cross effect EUR/GBP has on GBP/USD in terms of volume traded.)

Below, a picture perfect example of a price inefficiency.

Update: Moodys downgraded the U.K.'s credit rating on Friday after the U.S. equity markets closed causing the GBP to drop sharply against its peers and gap lower 100 pips on Sunday's open. It just goes to show you that good setups are never guaranteed to work. We all have losing trades; but managing risk is what sets the successful traders apart from everyone else.

It still remains an attractive setup that we'll look to play if price makes its way back up to 1.5315

New Zealand Dollar - Time for Intervention

Moments ago Royal Bank of New Zealand's Wheeler said the Kiwi was overvalued and that the RBNZ stood ready to intervene in the currency if necessary. The RBNZ members have long since been annoyed by what they consider to be an extremely high exchange rate due to speculation; but this is the first time they've mentioned the possibility that they may intervene in the FX market.

The Kiwi pairs have been trading at high levels recently and this announcement has surprised the market. There's plenty of room to the downside, and it seems probable that NZD/USD will come under significant selling pressure during the upcoming European and US sessions.

The important thing to know about NZD/USD is that it isn't as liquid of a currency pair compared to USD/CAD or AUD/USD. If this pair starts moving down and picks up momentum, the lack of liquidity could cause a sharp move down if carry trades begin to be unwound. The lack of liquidity can make it costly to unwind large trades, and this kind of comment could cause traders to start unwinding their trades now to avoid getting stuck in a nasty situation later on if NZD/USD dumps.