Tag: Forex Trading Idea

Forex Trading Idea – Gold

Nicholas

Strategy

Sell Gold at $1983.50 for a price movement to $1810. Stop should be placed above $2010. Time duration is estimated at about 2-3 months.

Technical View

Price had reached a high of $2009.75 and that high was accompanied by a Spinning Top candlestick price pattern, which is a hint of a possible price high. Stochastic is also hinting at a price decline with a reading above 80. There was a stochastic bearish crossover that is also hinting at a possible price decline.  However, 20EMA and MACD are both showing a bullish price trend and a continuation of this price rally. We think price may have reached a high and the move below the previous high at $1959.70 has confirmed the top and a decline back to February 2023 low at $1808.50.

Fundamental View

Price has a strong run up to above $2000 recently due to the banking crisis first in the US with Silicon Valley Bank and Signature Bank, followed by the Credit Suisse saga. However with the Federal Reserve providing liquidity to the banking system to avoid a crisis and UBS bank buying over Credit Suisse, risk sentiment is getting better. This could be detrimental to safe havens like gold.

Inflation in the U.S. had likely peaked and is currently on the recovery path. Gold which is often a hedge against inflation is likely to see less demand as an inflation hedge, weighing on its price. With inflation having reached its peak, the Federal Reserve is also on a less aggressive hike path. However, the Federal Reserve is still going ahead with rate hike and is likely to hike rates a few more times. Market is also expecting a terminal rate above 5%. A higher interest rate is likely to be detrimental to gold and likely to send price of gold lower.

FX Trading Idea – USD/JPY

Nicholas

Strategy

Buy USD/JPY at 131.00 for 137.00. Stop at 128.50. Time duration expected 2-3 months

Technical View

Price has reached a low of 129.50 on 3rd January 2023 and this low was accompanied by a divergence warning from the MACD indicator. In fact the MACD indicator has been warning with divergences of a possible price low for some time now and this could be the moment for price to finally do a correction rally higher. The decline is also coming into a strong support area. Fibonacci 62% of the rally is close to the low and is a support for price. There were supports around this area, which is now turning into supports for price. Stochastic indicator is near to the oversold zone but is moving higher, hinting at a possible price rally ahead. However, 20EMA is bearish and is capping a price rally at the moment.


Fundamental View

Current interest rate differential is in the U.S. dollar favour. This is likely to keep the U.S. dollar strong against the yen. The yen had strengthened in the last month of 2022 on the ground that the Bank of Japan was about to ditch its ultra-loose monetary policy but after 1 month, Japanese interest rate is still at zero percent. With an interest rate differential of 4.5%, the U.S. dollar is likely to gain against the yen. The Fed is also expected to hike rate at the beginning of February, albeit at a slower and smaller quantum, which is likely to keep the US dollar strong against the yen.

While a change of BOJ governor is keeping the yen strong on expectation of a hawkish governor, the uncertainty is also keeping the yen weak, at least until a new hawkish governor is chosen to lead the Japanese central bank.

Risk sentiment is improving with China re-opening its border and easing its COVID restrictions. Easing of COVID restrictions is likely to improve the global economies, weighing on the Japanese yen with its safe haven status. Re-opening of China and travel is likely to send more Chinese tourists aboard, helping the global economy. An improvement of the global economy is likely to weigh on the safe haven Japanese yen.

FX Trading Idea – USD/CHF

Nicholas

Strategy

Buy 0.9500 for 0.9750 with a stop below 0.9340. Time duration 1-2 months

Technical View

Price recently test the previous low at 0.93700 and was able to bounce up after the test. This is a sign of a strong support at this price location. We are likely to see the rally continues toward the Fibonacci 50% of the decline from the high at 1.0146 to the recent low at 0.9355.


Fundamental View

The Swiss National Bank recently hikes rate by 50 basis points from its previous rate of zero percent. However, when compared to the U.S. interest rate of 4%, the gulf in interest rate between these two countries is big. Interest rate differential is in the U.S. dollar favour and this is likely to aid the U.S. dollar against the Swiss Francs. Beside the current big different in interest rate differential, this gulf could also widen. The Fed is likely to hike interest rate in the coming months even if the pace of interest rate hikes slows down while the Swiss National Bank is unlikely to hike rate continuously in the coming months. The different path of rate hike is likely to keep the U.S. dollar stronger against the Swiss Francs.

Geopolitical risk is also likely to favour the U.S. dollar more than the Swiss francs. War in Europe between Russia and Ukraine is likely to drive more demand into the U.S. dollar compared to the Swiss francs. This war could even lead to a recession in Europe. This could aid the U.S. dollar. North Korea is another risk which will benefit the U.S. dollar. With North Korea firing more missiles, landing near to Japan and South Korea, the U.S. dollar is likely to be in demand due to its status as a safe haven currency.

An increase in COVID-19 cases in China has prompted Beijing to tightening restrictions. A tightening of restrictions is likely to affect the country GDP in the coming months. The rising cases have cast doubt on the hopes of an early easing in strict pandemic restrictions in China, which could lead to an economic slowdown in China. This is also likely to aid the safe haven U.S. dollar.

Forex Trading Idea USD/CAD

Nicholas

Strategy

Buy 1.2850 with a stop below 1.2700 for 1.3240. Time duration is 2-3 months.

Technical View

Price has been declining since reaching a high at 1.3078 on 13 June. The decline has come down to the Fibonacci 38% correction point as well as the 20EMA support line. If price is able to hold above this support level, there is a good chance price will try the topside at 1.3078 again. MACD has remained bullish and is hinting at a bullish price trend. 20EMA is also hinting at a bullish price trend. Only Stochastic is hinting at a price decline.

If price is able to hold above this support, we are likely to see another rally to the Fibonacci 127% price projection target at 1.3240 in the next few months ahead. However, a decline below the Fibonacci 62% price correction level is likely to send price lower to the base at 1.2555. We are bullish for 1.3240.

Fundamental View

In the previous week, the U.S. Federal Reserve hiked interest rate by a massive 75 basis points, which was the largest interest rate hike in history. As a result of this hike, interest rate in the U.S at 1.75%,  is now higher than in Canada, where interest rate is currently only 1.5%. Interest rate differential is now in the U.S. dollar favour, making the US dollar more attractive than that of Canadian dollar. Going forward, the Federal Reserve is going to be more aggressive in hiking rate than the Bank of Canada. In July, investors are expecting the Federal to hike interest rate by another 75 basis points and 50 basis points thereafter in August 2022. Interest rate differential is going to increase and this is likely to keep U.S. dollar stronger than the Canadian dollar.

Market is worried that the global economy would go into a recession with global central banks except the Bank of Japan, hiking rates. Higher interest rate could drive the global economy into a recession. As market risk increases, investors are also likely to turn to the U.S. dollar for its safe haven status.

Crude oil prices have also been declining on fear of global recession leading to less demand for oil. Despite a ban on Russian crude oil, price has been on a decline in the recent weeks. A decline in crude oil price is likely to weigh on the Canadian dollar.

Forex Trading Idea EUR/USD

Nicholas

Strategy

Buy 1.0590 for 1.1080 with a stop below 1.0300. Time duration is about 3 months.

Technical View

Price reached a peak in December 2020 and has been on a decline. The decline has brought price lower to a low of $1.0350 just two week ago. We think price might have reached a low. Stochastic has a bullish crossover in the oversold zone and is hinting at a price rally. Although MACD remains in the bearish zone and is hinting at a bearish price, a bullish crossover may happen as both lines are close by. A MACD crossover would reinforce the bullish price trend.

If there is a price rally, we are expecting price to travel to the Fibonacci 38% price correction of the decline currently at 1.1080. There is also previous price high around this region. This is likely to be the first resistance as well as the first target.

Fundamental View

European Central Bank President Christine Lagarde indicated negative interest rates, a euro zone feature for eight years, will most likely be gone by the end of September 2022. Lagarde’s hint to hike interest rate as early as July 2022 is likely to mean that the interest rate differential between the euro and the US dollar has probably peaked in May 2022. While the Federal Reserve is likely to hike interest rate, the interest rate gap between the 2 countries will not widen. The euro had declined since the middle of January 2022 from 1.1490 on expectations of a hike in US monetary policy while the ECB kept its interest rate in the negative zone.

Market has been betting on an aggressive interest rate hike by the Federal Reserve for the past 5 months. The Federal Reserve has also played its part. The Fed had already indicated an aggressive path by hiking interest rate by 50 basis points in the last FOMC meeting and is likely to hike interest rate by the same amount in the next FOMC meeting. But this aggressive hike path has also been priced into the euro decline.

Besides interest rate differential, war in Ukraine is also keeping the safe haven US dollar strong while weakening the euro. However, war in Ukraine has been raging for the past 3 months and by now, war has probably been factored into the euro decline for the past 5 months. Unless the war situation in Ukraine deteriorates, the US dollar is not going to gain from its status as a safe haven.