Tag: FX Trading Idea

Forex Trading Idea USD/CNH

Nicholas

Strategy

Buy 6.3750 for 6.5875 with a stop below 6.3035.

Technical View

On the weekly chart, the price decline is seen to be slowing down. Price had declined from the high at 7.1961 in May 2020 to the low at 6.3035 in 20 February 2022. The candlestick size in recent days is also getting smaller. Both Stochastic and MACD are hinting with divergence of a possible price low. These are signs of a potential bottom in the process of forming. Price has also moved above the 20EMA. This could be a confirmation of the low.

If price has formed a low at 6.3057, we are likely to see a price movement to the previous price resistance at 6.5875 in the next few months ahead.

Fundamental View

Since the beginning of March 2022, COVID-19 cases have been on a rise, reaching 4,569 cases on 22 March 2022. China has implemented lockdown as the government has a zero case policy. This zero policy has a cost on the economy. Production will be lower. Annual GDP and economic growth will be lower for the year. Markets now widely expect policymakers to resume monetary easing soon to revive an economy hit by a domestic COVID-19 resurgence. The Chinese economy is also weighed down by weaker credit growth and a faltering property sector as well. This is likely to lead to a weaker China yuan against the US dollar.

To help the economy, the Chinese central bank is likely to lower its interest rate. Reserve ratio requirement was lowed for the third time in January 2022 and is expected to be lowered another time in the 2nd quarter of 2022. Many analysts are forecasting a 50 basis point cut. This is likely to lead to a narrowing of interest rate differential between the U.S. and the Chinese currency, reducing the advantage of the yuan. With the U.S. Fed expected to hike rates, a widening monetary policy divergence between the world’s two largest economies could shrink China’s current yield advantage over the United States, triggering investors to put their money in U.S. dollar.

War in Ukraine is also likely to aid the safe haven U.S. dollar against the Chinese currency. Fundamental reasons are currently in favour of the US dollar and against the yuan.

FX Trading Idea NZD/USD

Nicholas

Strategy

Buy 0.6810 with a stop below 0.6610 for profit target at 0.7210. Duration of this trade could be 6 months.

Technical View

The price decline to the low of 0.6528 on 23 January, which was just above the Fibonacci 50% correction point of the rally from the low at 0.5466 to the high of 0.7216, could be a sign that the decline was just a price correction and the decline could have ended at 0.6528. Price has also moved above the 20EMA and if price were to close above the high at 0.6888, it is likely to move higher to the previous high at 0.7216. The strong green candle in the previous week is also a sign of a possible price low having formed.

Stochastic had a bullish crossover and had started to move higher, hinting at a price rally ahead. 20EMA has turned neutral after being in a bearish price trend. However, MACD remains bearish.  

Fundamental View

The Reserve Bank of New Zealand hiked rate for the third straight meeting, hiking interest rate to 1% in February 2022. The central bank also forecasts its cash rate climbing to 2.5% over the next 12 months and peaking at about 3.25% at the end of 2023. This is an increase over the forecast given in November, where the central bank had forecast a peak of about 2.5%. The reason given was to contain inflation. In the past few weeks, with crude oil prices and with mineral ores and grains prices shooting up as a result Russian invasion of Ukraine, the Reserve Bank of New Zealand is likely to increase its peak forecast again.

While the U.S. is also likely to increase its interest rate next week, it is likely to lag behind its New Zealand’s counterpart. Interest rate differential is now in the kiwi favour and is likely to remain into the next year. This is likely to keep the kiwi stronger against the U.S. dollar.

Despite the ongoing Russian-Ukraine war, with the safe haven U.S. in demand, the kiwi had held its ground against the U.S. dollar. While the war may rage on longer than expected, the kiwi is also likely to hold its ground against the U.S dollar.

FX Trading Idea – Silver

Nicholas

Strategy

Sell at $23.80 with a stop below $24.70 for profit target $22.00

Technical View

Price has been caught in the previous month range but looks like it could be declining to test the previous low again. A bearish Engulfing candlestick price pattern in the previous trading session is hinting that price may have hit a high. Stochastic is also in the overbought zone and there could be a bearish crossover by the Stochastic indicator in the coming days ahead. MACD is also turning down from its previous momentum peak, hinting at a bearish price trend. At the moment, only the 20EMA is hinting at a bullish price trend. However, we favour a decline back to $22.00.

Fundamental View

US 10-year Treasury yield rose to 2.0%, as   investors increasing expect a tight labour market and rising inflation to fuel the U.S. Federal Reserve into becoming more aggressive in raising rates and tapering its balance sheet of US$9 trillion. Recent employment data also adds fuel to expectations that the Fed will raise inflation rate to fight inflation given that a majority of citizens are in employment in the aftermath of the COVID-19 pandemic. With inflation running at 7.5% in February 2022, which is a 40-year high, the Fed may be forced to hike interest rate more and faster than its original plan of 8 interest rate hikes as disclosed by its chairman Powell in mid-December 2021.

Money market are also pricing in a 50bp rate hike by March 2022, which is earlier than what the Federal Reserve had indicated. The Federal Reserve had indicated that there will be 3 interest rate hikes this year, followed by another 3 hikes in 2023 and 2 more hikes in 2024. However, market has now priced in a one-in-three chance the Fed might hike by a full 50 basis points in March, and a reasonable chance rates will reach 1.5% by year end. This is double what the Fed had indicated.

A higher interest rate will increase the cost of holding Silver. While commodity prices are rising as a result of inflation, a faster pace of rate hikes by the Fed may be too much for Silver in the long run.

Forex Trading Idea USD/JPY

Nicholas

Strategy

Buy USD/JPY at 115.10 for 120. Stop at 113.30. Time duration expected. 4-6 months

Technical View

Price is trying to move above a recent high at 115.67 and a move above this high is likely to result in a test of 7 January 2022 high at 115.95. There is little price resistance above till 118.65 and the next higher resistance is at 121.30. Given the likely widening of yield and interest rate differential between these two currencies, the long term outlook is likely to be bullish for the US dollar and bearish for the Japanese yen.

Indicators are supporting a rising US dollar against the Japanese yen. 20EMA is rising and is hinting at a bullish price trend ahead. Stochastic is also rising and is just into the overbought zone. Stochastic should be able to support more price up moves in the near future. MACD remains bullish with both its lines above the zero line. MACD remains in a bullish crossover and is hinting at a bullish price trend ahead.

Fundamental View

US 10-year Treasury yield rose to 1.97%, the highest since November 2019, as   investors increasing expect a tight labour market and rising inflation to fuel the Fed into becoming more aggressive in raising rates and tapering its balance sheet of US$9 trillion. Recent employment data also adds fuel to expectations that the Fed will raise inflation rate to fight inflation given that a majority of citizen are in employment in the aftermath of the COVID-19 pandemic.

Money market are also pricing in a 50bp rate hike by March 2022, which is earlier than what the Federal Reserve had indicated. The Federal Reserve had indicated that there will be 3 interest rate hikes this year, followed by another 3 hikes in 2023 and 2 more hikes in 2024. However, market has now priced in a one-in-three chance the Fed might hike by a full 50 basis points in March, and a reasonable chance rates will reach 1.5% by year end. This is double what the Fed had indicated.

In contrast, 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. 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.

FOREX TRADING IDEA AUD/USD

Nicholas

Strategy

Sell AUD/USD at 0.7160 with a stop above 0.7380 and price target at 0.6760. Trade duration: 2-3 months

Technical View

Price was capped by the 20EMA for the past 4 weeks and this week, we are seeing the downtrend resuming its course again. Price is close to an important support at 0.6980. A break of this support is likely to send price lower to the Fibonacci 50% correction point at 0.6755. While Stochastic and MACD had given bullish divergence warnings, the trend is still strongly bearish and the price correction has so far been shallow at 38%. We think there is a high chance price can go lower to the Fibonacci 50% or even the 62% as this is the first rally after price hit a low at 0.5503, which is the lowest since 2002. MACD may have given a bullish divergence warning but MACD remains bearish. Similar, Stochastic is still near to the oversold extreme and is struggling to get out of the oversold zone. 20EMA is bearish and is hinting at a strong bearish price trend

Fundamental View

US 10-year Treasury yield rose to 1.848% as investors are now expecting the Federal Reserve to hike interest rate, starting in March 2022, at every meeting for the year 2022. That would mean 4 interest rate hikes in 2022, more than what was predicted in December last year. Powell, after last night FOMC meeting and in a press conference, told reporters there was “quite a bit of room to raise interest rates without threatening the labour market” and said the Fed was of a mind to begin lifting rates in March. A tight labour market and surging inflation fueled the Fed into becoming more aggressive in raising rates and tapering its balance sheet of US$8 trillion.

In contrast, the Reserve Bank of Australia is likely to keep rate steady at 0.25% until the year 2024 despite inflation running above the central bank’s target. Recently, its governor Lowe had said there is no change to the central bank policy although we doubt Australian interest rate would remain steady while global interest rates are on the rise. However, with every rate hike by the Fed every quarter, the interest rate differential between the US dollar and the Aussie dollar is likely to widen in the US dollar favour, leading to a stronger US dollar against the Australian dollar. Until the Reserve Bank of Australia decides to hike rates.