Tag: FX Trading Idea

FX Trading Idea – EUR/USD

Nicholas

Strategy

Sell EUR/USD at 1.0955. Stop at 1.1105 and profit target at 1.0615. Time duration is about 2-3 months

Technical View

Price in the previous week tested the upper edge of the cloud. Price managed to move above the cloud but closed the week inside the cloud. The previous week candlestick was in the form of a Spinning Top candlestick, which is a hint of a price reversal. The Fibonacci 50% correction point is also acting as a price resistance, enhancing the possibility of a possible price high. Price is likely to find difficulty in passing through these resistances.

Stochastic is also hinting at a possible price high and a likely bearish price trend ahead. However the Base line and the MACD are both hinting at a bullish price trend. We think the rally off the low in early October 2022 may have ended and a corrective decline back to the Base line support at 1.0615 is likely in the next 10-12 weeks.

Fundamental View

Non-farm payroll in the previous week had hinted at a strong labour market. With inflation still running above the Federal Reserve targeted rate of 2%, the U.S. central bank is likely and has room to hike interest rates. The strong labour market is likely to enable the U.S. central bank to keep interest rate higher for a longer period of time to tame inflation. A higher US interest rate is likely to aid the US dollar against the Euro.

While the Euro is also on a hiking path, European Central Bank chief has hinted the hike path may be near to its end. This is likely to keep the difference in interest rate in the US dollar favour, keeping the US dollar strong. The ECB may have limited scope to hike interest rate. The Eurozone economy is at risk of a recession due to high fuel prices. The risk of a Eurozone recession is also likely to weigh on the Euro dollar.

Yields on the US bonds are currently higher than that of the Euro bond. This is likely to attract investors into buy US Treasury and bond instead of Eurozone bonds. This is also likely to keep the US dollar strong on demand for bond purchase payment.

FX Trading Idea – USD/JPY

Nicholas

Strategy

Buy USD/JPY at 140.00 for 145.00. Stop can be place below 137.40. Time duration expected is 2-3 months.

Technical View

Price reached a high of $144.99 on the 7 September 2022 and we also a sharp correction in the next few days to $141.50. Stochastic is also in the overbought zone and is declining. This is a sign that the market is in correction after a strong rally since 27 July 2022 to the current high at $144.99. As long as the strong support zone at 139.92 down to 139.35 is not broken, this is likely to be a correction and we are likely to see a resumption of the uptrend back to $145 again in the next few months. This triple support zone is provided by the 20EMA as well as a previous price support. There is also a previous resistance turned support line supporting price. This is a strong support which price may not be able to move below.

 While stochastic is hinting at a price decline, both MACD and 20EMA are bullish and are hinting that this correction could be a corrective decline of the recent strong rally to $144.99.

Fundamental View

The USD/JPY reached a high of $144.99 on 7 September 2022 as the U.S. 10-year Treasury yield reached a high of 3.365%. This has helped the greenback strengthened again the rate-sensitive yen. A recent pullback in benchmark 10-year Treasury yield has seen the USD/JPY rate declined to $141.50. We view this drop in USD/JPY as temporary and we are likely to see a rally back to 145 again as the US interest rate is set to rise going into the year-end.

The US Federal Reserve is likely to hike rate by either 75 basis points or by 50 basis points in its 21 September 2022 FOMC meeting. This is likely to see the Treasury yield rise again as well as an increase in interest rate differential between the two currencies, sending the USD/JPY rate higher again.

The US Federal Reserve is also likely to keep hiking rate for the rest of this year as it tries to contain inflation which is running at multi-decade high. This is likely to send benchmark 10-year Treasury yield higher as well as increases the interest rate differential between the two currencies, aiding the US dollar against the yen.

In contrast, the Bank of Japan is likely to keep monetary policy stable in the coming months. The BOJ expects relatively flat economic activity in the near term with CPI holding below the central bank’s target. That would mean keeping interest rate steady at zero percent. That is likely to result in the interest rate differential between the two countries widening should the Federal Reserve continue to hike rate. This divergent monetary policy is likely to keep the Japanese yen weak against the US dollar.

Japanese investors are sensitive to US Treasury bond yields as the yield on Japanese Government bond is much lower than the yield on US Treasury bond. This is likely to spur Japanese investors to gain higher yields by investing in US Treasury bond.  That would result in selling of Japanese yen and buying of US dollar as payment for US bond purchases.

FX Trading Idea – AUD/USD

Nicholas

Strategy

Buy 0.7100 for 0.7455 with a stop below 0.6965. Time duration is expected to be 2-3 months.

Technical View

Price broke above an Inverse Head and Shoulder chart pattern, which is a reversal pattern, hinting at a potential upside in the coming days. This reversal chart pattern has a price target at 0.7455 in the next 2-3 months. Price has also moved above the 20EMA keeping the uptrend intact. MACD is bullish with both its lines above the zero line, hinting at a bullish price trend ahead. Stochastic is moving higher and has some more room to move before it reaches the overbought zone. Stochastic is hinting price can move higher.

We think the bearish trend that had persisted in the past 4 months had ended in early July and price is likely to move higher in the next 2-3 months ahead to the Inverse Head and Shoulder price target at 0.7455. Only a break of 0.6965 will negate our bullish view.

Fundamental View

Last Wednesday, data showed U.S. inflation was not as hot as anticipated in July, prompting traders to dial back future rate hike expectations by the Federal Reserve. On Thursday, U.S. producers’ prices data offered signs inflation could be moderating, as producer prices unexpectedly fell in July amid a drop in the cost for energy products, while jobless claims rose for a second straight week. These data are hinting that the U.S. Federal Reserve might be less aggressive in its hike cycle. It is likely to weigh down on the U.S. dollar while aiding the US dollar.

On the other hand, the Reserve Bank of Australia had started to hike rate. The Aussie central bank hiked rate again by 50 basis points on 2 August and it’s the fourth monthly rate hike in a row. This is a sign that with a less aggressive hike path by the Fed, the interest rate differential between the two countries could have peaked. This is likely to aid the Australian dollar.

The Aussie dollar had declined from 5 April after reaching a high of 0.7660. The decline to the low of 0.6709 on 12 July had been based on the expectation of an aggressive U.S. Fed rate hike as US inflation climbed to a multi-decade high at 9.1%. We think the interest rate differential between the two countries have peaked and the Aussie is likely to continue its climb higher after a 3-month decline.

Forex Trading Idea USD/JPY

Nicholas

Strategy

Buy USD/JPY at 127.50 for 135.70. Stop at 124.80. Time duration expected. 3-6 months

Technical View

After price reached a high of 131.34 on 9 May 2022, price went into a correction. The correction has so far stayed above the previous low of 126.93 as well as the 20EMA line, keeping the uptrend intact. If price stays above the 20EMA, there is a chance that price may test the previous high of 131.34 again. MACD had given divergence warning earlier but the decline could have been the correction predicted by the MACD divergence. MACD has also stayed bullish despite the price decline. MACD continues to hint at a bullish price trend.

Fundamental View

US 10-year Treasury yield rose to a high of 3.04% on 5 May 2022, the highest since 2018. Investors are expecting a rising inflation to fuel the Federal Reserve into becoming more aggressive in raising rates. In fact, investors are pricing as many as 6 hikes for 2022; bring the Fed fund close to 1.9% by the end of 2022 and to 2.8% by the end of 2023. This has resulted in the US benchmark 10-year rising while the Japanese counterpart yield has remains constant, resulting in a wider gap between the two nations’ bond yields.

The Bank of Japan is likely to keep monetary policy stable in the coming years. The BOJ expects relatively flat economic activity in the near term and CPI holding around zero. That would mean keeping interest rate steady at zero percent. Inflation in Japan is also below the target set by the Bank of Japan. That is likely to result in the interest rate differential between the two countries widening further in 2022 and in 2023. This is likely to keep the Japanese yen weak against the US dollar.

Japanese investors are sensitive to US Treasury bond yields as the yield on Japanese Government bond is much lower than the yield on US Treasury. This is likely to spur Japanese investors to gain higher yields by investing in US Treasury.  That would result in selling of Japanese yen and buying of US dollar as payment for US bond purchases.

FX Trading Idea – USD/CHF

Nicholas

Strategy

Buy 0.9250 for 0.9650. Stop at 0.8990. Time Duration 2-3 months

Technical View

Price has been moving in a gradual uptrend channel and is also supported by the rising 20EMA line. On the past 5 occasions where price dips below the 20EMA, price has managed to bounce back up again. The uptrend could send price higher to the next price resistance at 0.9650. Stochastic is rising and hinting at a bullish price trend. MACD remains above the zero line and is hinting at a bullish price trend. However, MACD is also hinting that the uptrend is not strong. If price stays above the 20EMA it is likely to move higher to test the previous low turned resistance point at 0.9650 in the next 2-3 months.



Fundamental View

The Swiss franc currently has the world lowest interest rate at minus 0.75%. The Swiss National Bank kept its ultra-expansive monetary policy unchanged after its meeting on 24 March 2022, bucking the current global market trend where central banks are hiking interest rate to tackle rising inflation. A strong Swiss currency as well as a tame domestic inflation has allowed the SNB to keep interest rate in the negative zone. On the other hand, the US dollar has an interest rate of 0.25% which effective gives the greenback an interest rate differential advantage.

The Federal Reserve has also indicated it will be raising interest rate during the year 2022. It has indicated it will be raising interest rate 3 times in the year 2022. However, market and recent developments have raised the number of hikes to 5 or 6 times by the end of the year to tackle surging inflation which is running at a 40-year high. The Swiss National Bank is expected to its monetary policy and interest rate unchanged for 2022, as a tame inflation and war in Ukraine is clouding the Swiss economy, keeping the SNB on hold. An increasing interest rate differential is likely to keep the US dollar stronger than the franc.

Geopolitical events are also unlikely to aid the Swiss franc. War in Ukraine, at the beginning had kept the safe haven Swiss franc stronger against the U.S. dollar. Six weeks after Russia invaded Ukraine, investors are getting used to the current situation. Unless the situation in Ukraine flared up, the Swiss franc will stay weak against the U.S. dollar. Other than the current Ukraine situation, there is no other geopolitical event that could help the franc at the moment.