Tag: FX Trading Idea

FOREX TRADING IDEA USD/JPY

Nicholas

Strategy

Buy USD/JPY at 115.30 for 118.60. Stop at 113.90. Time duration expected. 4-6 months

Technical View

Price moved above 115.50 in the previous week, creating a 5-year high in the process. We are likely to see price continues its rally to the high of 118.60. Stochastic has just crossed over into the overbought zone and is likely to support further upsides in this pair. A strong trend can keep Stochastic in the overbought zone for a prolong period of time. 20EMA is hinting that a strong bullish price trend is likely with its steep slope. MACD is also bullish with both its lines above the zero line. However, MACD may develop a divergence warning. Given the strong bullish trend, we think price should be able to move to the next resistance with divergence warnings developing.

Fundamental View

US 10-year Treasury yield rose above 1.80% to a 2-year high on 10 January 2022 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 25bp 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.

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 EUR/USD

Nicholas

Strategy

Sell 1.1440 for 1.0700 with a stop above 1.1700. Time duration could be about 3-6 months.

Technical View

Price has been on a decline since 3 January 2021 and over the course of almost 1 year, price has declined to a low of 1.1185. We do not think that this is the low. Rather we think there will be a corrective rally and after the corrective rally to 1.1500, we are likely to see price move lower to 1.0700, which is also the low back in March 2020.

Stochastic is inside the oversold zone and this is the reason why we think there is likely to be a corrective rally. A bunch of Doji candlesticks is supporting the stochastic indicator, hinting at a possible price low. However the trend is bearish as indicated by the declining 20EMA as well as the MACD indicator. In fact the 20EMA is pointing lower with a steep slope, hinting at a strong bearish price trend.

Fundamental View

The Federal Reserve, after its monetary policy meeting on Wednesday had indicated that taping amount will be increased and by March 2022, it will end its pandemic-era bond purchases. The Federal Reserve also announced that there will be a 0.75% interest rate hike in the year 2022. If we break that down to 0.25% interest rate hike that would be 3 interest rate hikes in 2022 after March. That could mean there will be an interest rate hike every quarter in 2022. There will be another 3 more interest rate hikes in 2023 and two more in 2024 to contain inflation.

The next day, after its monetary policy meeting, the European Central Bank keep its interest rate unchanged at zero percent. Current interest rate differential is in the US dollar’s favour. Going into 2022, this interest rate differential is likely to grow wider in favour of the US dollar, driving the Euro lower against the US dollar. The yields on US Treasury is likely to be higher than its European counterpart. This is also going to support demand for the US dollar and drive the Euro lower.

This divergence in monetary policy and interest rate hike between the Federal Reserve and the European Central Banks are likely to drive the Euro dollar lower against the US dollar. The spread of omicron in Europe is also likely to weigh on the Euro. The US dollar is likely to benefit from this Omicron crisis due to its status as a safe haven.

Forex Trading Idea AUD/NZD

Nicholas

Strategy

Sell 1.0450 with a stop at 1.0580. Profit target is set at 1.0275. Time duration is estimated to be 2-3 months.

Technical View

Price is approaching a previous high at 1.0455 and while there is no divergence warning from the MACD indicator, the reading on the MACD is near to an extreme. Stochastic is also in the overbought extreme. Stochastic and MACD are hinting of a limited upside. If price is unable to move above the previous high, we are likely to see a price decline, which could bring price back to the previous low of 1.0275. Since early November 2021, price has been in a range and both stochastic and MACD are hinting that this range may not be broken. If price is unable to break above the topside of the range, we are likely to stay in this range and a test of the range’s low is likely.

The price movement of the low at 1.0275 has not moved above the Fibonacci 62% of the decline from the high at 1.0610. This is another sign that the recent rally could be a corrective rally. Once the rally is exhausted, we are likely to see another decline to the previous low of 1.0275 or even lower.

Fundamental View

The Reserve Bank of New Zealand hiked interest rate today to 0.75% and going by some forecasts, the RBNZ is likely to hike another time before the end of the first quarter of 2022, bringing the interest rate to 1%. The RBNZ also projected interest rate at 1.78% by June 2024.

On the other hand the Reserve Bank of Australia has kept interest rate unchanged in its previous monetary policy meeting at 0.1%. The RBA has even pledged to keep interest rate low until 2024. Its governor, Phillip Lowe in the previous monetary policy meeting, stated that while labour situation has improved, inflation and wages are subdued and the central bank is unlikely to raise its cash rate any time before 2024. While it is unlikely Aussie interest rate will not be hiked before 2024, the divergence policy between the two central banks is likely to weaken the Aussie against the Kiwi.

Interest rate differential is in the Kiwi’s favour. The differential is currently at 0.65% and this differential is likely to increase given the divergence policy between the two central banks. This big differential is likely to work against the Aussie and keep investors away from the Aussie dollar and into the kiwi dollar. The swap rate for likely to make it expensive for Aussie long position against short kiwi position. Going forward, with the gap in interest rate differential to be wider by 2024, the Kiwi is likely to be stronger, based on just interest rate against the Aussie dollar.

Forex Trading Idea USD/JPY

Nicholas

Strategy

Buy USD/JPY at 113.30 for 116.15. Stop at 111.50.

Technical View

Price broke above February 2020’s high at 112.27 in the previous week and has moved to a high of 114.46 as of Monday 18 October. There is a possible divergence warning from the MACD on the 4-hourly chart, which means price could be near to a short term high. However, the trend remains bullish and we could take the short term correction as an opportunity to enter into the market.

On the weekly chart, the Fibonacci 127% lies at 113.30 and this could be an opportunity to get into the bullish trend. After breaking above the high at 127%, price is likely to proceed higher to test the Fibonacci expansion price target at 116.15. Stochastic is rising and has not yet reached the overbought zone, which is a sign, that the price rally still has room to continue higher. MACD is bullish with both its lines above the zero line. A bullish MACD crossover is also hinting of a bullish price trend ahead. 20EMA is bullish and rising, hinting of a bullish price trend ahead.

Fundamental View

US 10-year Treasury yield rose above 1.60% to a high of 1.607% on 18 Oct. 21, which is its highest since July 2021, aiding the US dollar against the Japanese yen. Japanese investors are sensitive to US Treasury bond yields. The yield on Japanese Government bond is much lower than the yield on US Treasury. Japanese investors would 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.

Crude oil price has been on a rally, rising to a 3 years high. A rise in oil price is likely to lead to inflation, which is likely to lead to an earlier than expected US interest rate hike as well. Last Friday, a market indication of inflation expectations hit the highest since 2005 as an unexpected increase in U.S. retail sales in September added to the inflationary pressure.

The Federal Reserve had in the previous month indicated that asset purchases would be reduced by the end of this year, with market expecting a taper this November. Money market are also pricing in a 25bp rate hike by July 2022, which is earlier than what the Federal had indicated. This is likely to support the US dollar against the Japanese yen.

Forex Trading Idea USD/SGD

Nicholas

Strategy

Buy 1.3600 with a stop below 1.3490 for 1.3810

Technical View
Price broke above the cloud recently changing the chart outlook from bearish to bullish. The breakout also has a larger candlestick than the candlesticks of the past few days, hinting of a genuine breakout. Conversion and Base lines had a bullish crossover, hinting of a bullish price trend. Lagging Span is above price of 26 days ago as well as above the cloud, confirming the bullish price trend. Going by the Fibonacci price projection, price could be moving to the 261.8% price projection target at 1.3810 if price can break above the immediate overhead resistance at 1.3690. MACD is bullish and both its lines are moving higher, which is a hint that price could be moving higher in immediate future.

Fundamental View

US 10-year Treasury yield has been rising and has reached a high of 1.56%, it’s highest in the past three month, aiding the US dollar and its rally against its major peers. The Singapore dollar is no exception and is expected to weaken further as yields continues to move higher. US Treasury yields are expected to move higher as the Federal Reserve reduced its asset purchases later in the year before raising interest rate in 2022.

Heightened worries about the global growth outlook is also lending support to the safe haven US dollar. Global growth seems to hit by inflation and supply shortage. With demand growing as the global economy recovers from the COVID-19 pandemic, as producers tried to ramp up production, a power and fuel shortage in China and Britain respectively is hitting supply chain hard. As a result, price increase can be attributed to inflation and not real growth.

US government has reached the limit on its debt ceiling and Congress is trying to raise this limit so that the Federal government will not go into a default. While the risk of a default is low, with Congress likely to pass a higher debt ceiling like it did in previous year, the risk is there and investors are taking cautions and are turning to the safe haven US dollar instead of riskier currencies.