Tag: FX Trading Idea

Forex Trading Idea AUD/JPY

Nicholas

Strategy

Sell 79.50 with a stop at 82.50 for 73.50

Technical View

The rally from the low of 77.88 was capped by the Fibonacci 50% correction point of the decline from 85.79 to the low of 77.88 at 82.01. This could be a sign that the rally was a corrective rally. A bearish Star candlestick price pattern also hints of a possible price high and a likely reversal. Since the high at 82.01, price has been on a decline and we think this decline is likely to break the low at 77.88. The decline is likely to move lower to 73.20 in the next 3-4 month ahead.

Stochastic is on a decline and is near to the oversold zone but MACD is about to turn bearish and is hinting of a bearish price trend ahead. 20EMA is pointing lower with a steep slope which is a hint of a strong bearish price trend ahead.

Fundamental View

In the current market environment, investors’ sentiment is rattled by potential contagion from China Evergrande Group. All eyes are now on whether China Evergrande Group will default on its bond interest repayment, with a deadline for an $83.5 million interest payment on one of its bonds due on this Thursday. The AUD/JPY has weakened as a result. The Japanese yen is a safe haven which is sought after when the financial market worries are high and as investors seeks solace in safe haven. The Aussie dollar on the other hand is a proxy for the China yuan. The yuan weakened as far as 6.4879 on Monday for the first time since Aug. 23 on worries that a default from Evergrande could cause a global financial crisis. The Aussie dollar touches a 4-week low at 0.7219. Risk is likely to increase if Evergrande is unable to make repayment to its debtors. This is likely to drag the AUD/JPY lower.

There is also uncertainty on the US tapering. This is also likely to increase market risk which is likely to send investors seeking the safe haven yen against the risky Aussie dollar.

Forex Trading Idea NZD/USD

Nicholas

Strategy

Buy 0.6940 for 0.7460 with a stop below 0.6850. Duration of this trade could be 6 months.

Technical View

Price had reached a low of 0.6467 in March 2019 and has been climbing since that low. Price reached a high of 0.7463 to end the rally and has been in a corrective decline. The corrective decline had found support at the Fibonacci 62% correction point. The ability to stay above the Fibonacci 62% correction point is usually a sign of a possible end of the correction and a reversal is likely to follow. This seems to be the case for this currency pair as well. As long as price stays above 0.6880, it could be heading higher towards its previous high of 0.7463 again in the next 6 months ahead, especially if the Reserve Bank of New Zealand were to hike rate by the end of this year.

Both Stochastic and MACD have been in divergence with price. When price made a lower low at 0.6880, both Stochastic and MACD did not made lower low. This supports the view of a possible price low at the Fibonacci 62% correction point of the advance. Stochastic is close to the oversold zone and is moving higher, hinting of a price rally ahead. MACD, while in the bearish zone is also moving higher and hinting that price will move higher unless MACD starts to turn down again. 20EMA is close to price and is neutral at the moment. This could be view as a possible turning point as well.

Fundamental View

The Reserve Bank of New Zealand, in a press conference after its monetary policy meeting in May 26, hinted that the RBNZ was likely to hike its interest rate by September 2022. The central bank also projected interest rate at 1.78% by June 2024. However in its July meeting, RBNZ agreed that economic conditions since late 2020 have been persistently stronger than anticipated. It has since decided to end its monetary support for the economy. This has led to numerous banks adjusting their predication on interest rate trajectory for the Kiwi dollar.

Westpac Bank has forecasted the RBNZ to hike interest rate three times by the end of 2021, with each hike of 25 basis points each. Going by this projection, the Kiwi interest rate would be 1% by the end of 2021. ANZ bank on the other hand is more conservative. ANZ Bank is forecasting New Zealand cash overnight rate to hit 1.75% by September 2022.

At the current level, interest rate in New Zealand is 0.25%, going forward, the gap in interest rate differential between the U.S. and New Zealand is expected to widen by September 2022. The Federal Reserve has yet to announce when it will taper its monetary policy and is unlikely to announce a tapering in its FOMC meeting this week. The Fed, on the other hand has maintained it will keep its monetary policy accommodative as the US economy has not met the Fed’s conditions for a tightening.

We are expecting this widening interest rate differential between the US and New Zealand to lead to a stronger New Zealand over the next 6-9 months.

Forex Trading Idea AUD/NZD

Nicholas

Strategy
Sell 1.0730 with a stop at 1.0815. Profit target is set at 1.0615. Time duration is estimated to be 3-4 months.

Technical View
After reaching a high of 1.0810, price has been declining. In the previous few days, it had declined below the 20EMA and had stay below the 20EMA, which is a hint of a bearish price trend. The high of 1.0810 is also the Fibonacci 62% correction point of the decline from the high of 1.0945 to the low of 1.0611. This is another sign that the rally was just a corrective rally and we are likely to see a decline back to test the low of 1.0611 as long as price does not move above 1.0810.

MACD has turned bearish and is hinting of a bearish price trend ahead. However, Stochastic is close to the oversold zone. 20EMA is also bearish. Considering these three technical indicators, we think the trend is bearish but the downside could be limited to 1.0611

Fundamental View
The Reserve Bank of Australia yesterday, after its monetary policy meeting, kept its cash rate at 0.1%. Its governor, Phillip Lowe 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.

The Reserve Bank of New Zealand, in a press conference after its monetary policy meeting in May 26, hinted that the RBNZ was likely to hike its interest rate by September 2022. The central bank also projected interest rate at 1.78% by June 2024. At the current level, interest rate in New Zealand is 0.25%, which is already higher than its Australian counterpart at 0.1%, lending support to the Kiwi. 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.

Yesterday, a NZIER Quarterly Survey of Business Opinion (QSBO), a closely watched NZ economic indicator, came in at 7% against a 13% decline. The sharp improvement in business confidence prompted ASB bank to pull forward rate hike expectation to just 4 months away in November 2021. Another 2 banks are both also calling for a hike rate in November 2021. In fact, the market is already pricing in a November 2021 rate hike. This is likely to aid the kiwi against the Aussie dollar.

FX Trading Idea – EUR/USD

Nicholas

Strategy

Sell 1.2020 for 1.1600 with a stop above 1.2280. Time duration could be about 6-9 months.

Technical View
Price reached a high of 1.2032 in late May 2021, which was lower than the previous high at 1.2349 back in early March 2021. Price may have formed a potential Double Tops chart pattern. This could be a sign that price had reached a high and a correction could be unfolding with a target of 1.1600 at the Fibonacci 127% of the decline from 1.2349 to 1.1703. This is also near to the Fibonacci 50% correction point of the rally from 1.0637 to 1.2349.

Stochastic has a bearish crossover near to the overbought zone, which is a hint of a potential declining price trend. MACD also has a bearish crossover near to the zero line, which could be a hint of a potential downtrend as well. 20EMA has turned bearish and is hinting of a bearish price trend. These 3 indicators are all hinting of a potential downtrend ahead.

Fundamental View
The U.S. is likely to reap the growth rewards that it sowed with its massive fiscal stimulus policy. This is likely to see GDP growth rate out-performs its peers other than China. The US GDP is projected to grow 2.9%, higher than the Eurozone growth rate of 2.8% with data from Factset. This is likely to result in the US dollar being stronger than the Euro currency.

With the US economy growing, inflation has also crept higher, resulting in US bond yield generating a higher return than the Eurozone bond yields. Euro zone inflation projection has fallen below the European central bank projection as well. In the latest ECB press conference, it said that inflation target has been below target for the forecasted period. This is likely to support the US dollar against the Euro currency.

With US bond yields returning a higher return than its European counterpart, it is likely that European investors will turn to US bonds, creating a buy US dollar demand by selling the Euro currency to purchase US bonds. This is also likely to lead to a strong US dollar against the Euro currency.

FX Trading Idea – USD/SGD

Nicholas

Strategy
Buy 1.3160 with a stop below 1.3000 for 1.3530

Technical View
After reaching a high at 1.4645 in March 2020, price has been on a decline. The decline had reached a low of 1.3155 on January 2021 and a second attempt to test the low also managed to hold above this support. The second test recently could be a sign that the 12 months downtrend could be coming to an end. This could be a base building process. Ability to hold above this low is likely to lead to a rally that could bring price to 1.3530.

Stochastic is almost into the oversold zone, hinting of a limited downside. MACD is bearish at the moment but is close to the zero line, which is a hint of a weak downtrend. 20EMA is near to price and its gradient is also not steep. This is also a sign that the downtrend has become weak. A move above the 20EMA could bring higher to test 1.3530.

Fundamental View
The number of coronavirus cases continues to decline in the US and successful vaccine rollout is one of the reasons that have led to a re-opening of the US economy. The re-opening of the US economic has led to sentiment improving as the economy recover from the COVID-19 pandemic. In fact, the US economy is recovering at its fastest pace in the past 40 years and inflation is a big worry for the investing public as well as the central bank. While this week FOMC is too early for the Federal Reserve to announce a tapering, it is likely that an earlier than expected tapering is likely. This is likely to lead to US bond yields rising and a stronger US dollar.

With the US recovering, with the number of unemployed numbers being reduced as the economic recovery picked up pace, the US central bank may not be able to hold off hiking interest well into 2022 as has been promised and the investing public has come to accept. An earlier end of ultra-easy monetary policy is likely to lead to a stronger US dollar. With the IMF upgrading global economic growth for a second time in 3 months to 6%, it is more likely we will see a hike in interest rate than we have come to expect and led to believe by the US central bank.

A recent increase in the number to coronavirus cases in Singapore had led to a second phrase of lockdown in Singapore which is likely to affect its economic performance. This could lead to the Singapore dollar losing its strength gained over the past 12 months. While there is improvement in the fight against the virus in Singapore, there are still no signs when the lockdown could be fully lifted which could drag its economic growth lower.