Technical Trade - A Hawkish AUD Ahead of AUD/USD

It’s just a few hours away before the announcement of key interest rates from Reserve Bank of Australia (RBA) for AUD. All technicals seem to be pointing a bear for the AUD.

GBP Still Strong

The British pound is still strong today, showing a little bit of follow through from yesterdays gains. Yesterday I called out a trade in GBP/AUD as a low risk opportunity based on some technical factors, despite the fact that the trade was “counter-trend”. Let’s see how its doing:

As you can see, this trade is up about 169 pips from yesterdays entry price (1.7828-1.7659=169 pips). While you’re not going to be able to retire just yet LOL, this high probabilty set-up is showing some initial gains and looks promising going forward. To give you an idea of what this means, with just one lot, you would have made $169 if you were in this trade.

And the cost to get into this trade? Just $50 in margin. So in theory, you put up $50 to make $169. That’s pretty good coin! Now imagine what happens when you use the multiplier effect of leverage!

While its never a good idea to over-leverage your account, taking high probability trade set-ups can be extremely profitable if you know what you’re doing!

To learn about how to spot trade set-ups such as these, check out our currency trading courses

Good Day for the Commodity Currencies

Today’s top gainer is the NZD, the New Zealand kiwi, up 2.2% vs. USD, 1.8% vs. JPY, and 1.68% vs. EUR. This comes on the back of recent gains in both gold and oil up today to 1058 and 79 respectively. Also, helping the gains was Helicopter Ben, who again today re-iterated that accommodative monetary policy will be pursued for “an extended period”.

This means its game on for the commodity currencies, who benefit from the carry trade as investors seek out higher yielding currencies. As a result, both the Aussie and the Kiwi have traded to 14-month highs, back to the levels pre-credit crisis collapse which sent investors back to the US dollar in a flight to safety.

As confidence rises here in the US, (a rising stock market will do that- recent history be damned), investors will seek out more “risk” and move to the currencies that will benefit from strong commodities prices and higher interest rates.

Let’s take a look at a daily chart of Kiwi vs. US dollar (NZD/USD) (click chart to enlarge)

While this chart is a trend followers dream, its always difficult to jump in as it may seem close to a top. I usually like to wait for a pullback or for a sideways move (consolidation) before attempting to initiate a new trade, although I’m not certain that I will get one.

But for now, it looks like Bernanke is going to continue to get away with his “strong dollar policy” as the US dollar continues to tank against all currencies (except maybe the Yen- but that’s another discussion). If US stock earnings continue to “surprise” (meaning beat analyst low-ball expectations) and commodity prices hold up, expect Bernanke to sit idly by and do nothing as the US dollar continues to get crushed.

To learn about how you can participate in this global market and protect your dollar savings, be sure to check out our

GBP/AUD Trade Follow-Up

I just wanted to give readers a heads up on this trade that I called out last week. To give you a little background, I don’t typically like to say that I am doing this or that, but rather like to point out “possible trades” with “theoretical results.” Whether I am actually in the trade or not is immaterial for discussion purposes on this blog, as I don’t want to be seen as recommending specific trades, but rather as just trying to point out some tidbits that may be unconventional to some.

The reason I say this (and have disclaimers LOL) is because right after I posted this initial trade idea, I got a call from a good friend of mine who asked me in no uncertain terms, “Are you Nuts?” When I asked what he meant he gave me the usual response of don’t fight the trend, the fundamentals don’t add up, the Aussie is benefiting from the carry trade, BOE trying to keep GBP low through further threats of more QE, etc. And while I was aware of all of these factors before I picked this trade, something told me I should investigate this a little further.

Perhaps it was yesterdays sell-off of this pair that had me second guessing myself, but I realized that when dealing with trend-reversals rarely do they happen and then go strait up. So I decided to do some multi-time frame analysis.

Now you may be asking yourself, why don’t you use technical indicators? Well, I do, but do after the fact as confirmation to see if it matches up with what I’m seeing from the price action on the chart. What I’d rather do is begin looking at shorter time-frames to see if any discernible patterns are emerging.

Voila! I dropped down 1 time-frame (which for me is the 4-hour chart) and noticed what I thought to be a possible cup & handle formation. This is a very bullish pattern if it completes properl


Now you’ll have to forgive my awful chart-drawing skills, but as you can see, there is a very rudimentary c&h formation in progress. Should this pair breakout above the “brim” of the cup at around 1.785, then we could see some momentum to the upside.

To come up with a target price, I added the height of the cup to the breakout price of the handle and came up with roughly 500 pips. But because I am already in this trade (half position- I took some profits), I don’t need to take any action at this point. But if this should breakout above the handle, then one could play the break-out by buying just above that price level.

So while at this point the fundamentals still don’t add up for this trade, stranger things have happened. Its amazing to watch how the technicals sometimes predict fundamental action. Whether or not it will in this case is anyone’s guess. But that is what trading is about, not trying to guess where the market is going, but rather trying to increase your odds that a particular action may take place and having sufficient risk management in place if it doesn’t occur.

So keep an eye on this pair to see if this formation “activates”, and if so, listen to the news to see if anything material has taken place. Or you can just check back here… as I will be sure to update.

Good trading to all!

To learn about these possible set-ups, be sure to check out our

Trade Update- GBP/AUD

As I’m sure you know by now, GBP had a nice move overnight and is currently up vs. (USD & JPY). Earlier this morning, it was also up a lot vs. AUD (this trade) to 1.8. When I saw this this morning, I placed a protective stop at 1.795 for another piece of my position and got stopped out on that piece.

Since that time, GBP/AUD has traded down and is now at 1.782. Anytime I am in a position that has a significant move, the DAY AFTER, I enter a new or confirm an older position, I will always take some profits. 150 pips looked good to me.

The commodity currencies, particularly NZD and AUD, are having good days as Reserve Bank Governor Bollard stated that the fact that the Kiwi is already strong would not preclude them from raising interest rates. Similar thoughts were made by Australia’s Glenn Stevens as well.

So while that all but kills any further chance of this trade succeeding more than it already has, I’m still going to sit in this last piece and see what happens. So my stop is at 1.766, my entry price on the initial trade.

Let’s see what happens as the all bank-talk seems to be heating up!

Dollar at a (Technical) Crossroads

I deliberately concluded my last post on a somewhat ambiguous note; even though though the deck is stacked against the Dollar, its 14% decline in 2009 has left it perilously close to record lows, and traders are nervous about pushing the limits further.

Euro

On the one hand, everyone believes that the Dollar is fundamentally still in a weak position. The US balance of trade remains deep in deficit. Government spending has exploded, with record-setting deficits and an expansion in the national debt. Interest rates are at rock bottom, and are by some measures, the lowest in the world. Despite signs of life, the economy remains mired in recession. The money supply has also expanding, to the extent that some long-term investors are wondering out loud about the possibility of future inflation.

As a result, the decline in the Dollar since last spring has suffered very few blips, with volatility declining at the same pace as the currency, itself. “There seems to be a paradigm shift underway where more and more foreign investors are becoming concerned that the long-term path of the dollar is downward,” summarized one analyst. The consensus among investors is almost eerie. “Speculators betting that the dollar index will fall outnumber those betting that it will rise by nearly 2 to 1, according to the Commodity Futures Trading Commission.”

Some (mainstream) analysts have even begun to open consider the possibility of a crash in the Dollar, a view that had previously been relegated to conspiracy theorists and doomsday scenarists. “In a run on the dollar, that thinking would create a cascade — fearful global investors would shy away from dollars, expecting further steep declines, creating a self-fulfilling prophesy.” Adds a former Chief Economist of the IMF, “Every time the dollar starts depreciating there is angst and everybody starts raising the question what happens if there is a collapse.” While the majority of Dollar-watchers still believe that a Dollar crash is unlikely, the point is that they are now discussing it actively.

Despite the fact that all of these factors are already in place, the Dollar remains relatively buoyant. Personally, I think this is because investors don’t really want to acknowledge that this is a real possibility. For one thing, the alternatives aren’t any better. While forex investors in recent years have enjoyed ganging up on the Dollar, the fact remains the fundamentals for the other major currencies remain just as weak. For example, a model of purchasing power parity developed by “the Organization for Economic Cooperation and Development finds the dollar is worth roughly 0.85 euro, compared with its market valuation of 0.67 euro, suggesting that the euro is 21% overvalued.” Likewise, the Yen is held to be 22% undervalued.

As a result, the market as a whole is having trouble pushing the boundaries. The Dollar has approached the psychologically important level of $1.50/Euro on several occasions, but has retreated each time. “People are wondering whether we’re going back to $1.46 in euro/dollar or heading toward $1.54. But one thing is for sure, as we head toward $1.50, we’re going to experience a lot of volatility,” summarized one analyst.

“Risk reversals, a measure of currency sentiment in the options market derived by looking at the difference in implied volatility between out of the money calls and out of the money puts, show a bias for euro puts, trading at a mid-market level of 0.2. That means investors are hedging their short dollar positions with bets for a euro downside even though no one expects the euro to fall.” Meanwhile, volatility has edged up slightly, reflecting an increased level of uncertainty surround the near-term direction of the Dollar. It could be the case that if the Euro breaks through $1.50, heartened investors will send the currency up even higher, while a failure to break through means investors just aren’t read to commit. A classic technical crossroads!

Daily Forex Predictions for Oct 16, 2009

Daily Forex Predictions for Oct 16, 2009
(update: 10:12am GMT+7)

EUR/USD
It is more likely to go up to around 1.5, and after that, it might have potentially to go down. Prefer to find the best price first to enter Buy, may be at around 1.49.
(Current Price: 1.4940)

GBP/USD
It is more likely to go up to around 1.64, and after that, it might have potentially to go down to around 1.63.
(Current Price: 1.6379)