How to trade forex properly
This range has allowed broader markets to stabilise as they digest the potential for central banks to target steeper yield curves. Intraday FX investors may become more sensitive to oil-related news in the coming week as OPEC meets in Algiers. Saudi Arabia and Iran have had a pre-meeting in the past two days but are reported to have not reached any agreement. CAD CPI watched: CAD is still more sensitive to oil prices than NOK, and this may be due to the potential for a central bank policy change in Canada. We will get more clues on its path for policy today, with both CPI and retail sales due this afternoon. Canada remains within an adjustment process after heavily investing in the oil market and seeing the oil price halve. We still promote a short CADNOK trade which has been further supported yesterday by Norges Bank no longer looking to cut rates, in contrast with the BoC. The Exhibit below shows the diverging fiscal policies too, where Norway has been expanding spending over the past year, which has helped growth to stabilise. Both oil economies have seen housing booms but Norges Bank now seems less worried about the risks as growth in the non-oil sector has stabilised. GBP: Data to guide BoE: GBP has become less sensitive tooil over recent weeks, suggesting that the main driver is economic data and the impact that may have on monetary policy and investment in the UK. However, Forbes did suggest that she would not vote to stop the purchase programme now. Business investment into the UK will depend largely on the certainty over the new rules after Brexit. Divergences within the Conservative party are starting to arise over the timing of the triggering of Article 50 and potentially if it will be a hard or soft Brexit. Yesterday Foreign Secretary Boris Johnson was giving a speech saying that Article 50 would be triggered early next year and there would be a jumbo trade deal with curbs on immigration. PM May soon said that the decision would be hers when to trigger. This uncertainty should keep GBP as an underperformer. Businesses are reporting less positive credit conditions as suggested by the US credit managers index, which in August fell to from a high of in April; this index follows ISM closely. We can use US inflation expectations as a gauge for the US economic outlook. That is the calm region at the centre of a storm, followed soon after by its most damaging winds and intense rainfall. Could Donald Trump provide that? His tax cuts could provide a boost for risk assets, but trade rhetoric could see MXN, CAD, CNY and US trade-dependent currencies significantly underperform. Winning the Presidency without also winning Florida is very rare. Since this has happened only twice. Interestingly, the last time it happened was inwhen a Clinton was on the ticket. However, the ebb and flow of price action could start to become sensitive to it, especially if the market believes the implied probability after a political event for how could be higher than polling suggests. Subscribe now or get a free 5-day trial. It is clear that the Republicans are at an Electoral College disadvantage. The election forecasting is a product of both national and state-wide polling. State polling on an individual basis is interesting but not necessarily telling for the national outcome in all cases, especially if polling is tight. Since this has only happened twice. Brexit was an example of that, with many other examples over the years. The argument in favour of political polling for the US election though is that there is a lot of historical data to work with as this is a recurring event and forecasters have learned from the errors of past. So could it be that, as with the Brexit polling, there is a factor that pollsters are missing? This week has seen the start of the Republican convention and Donald Trump formally nominated for president by the Republican Party. Nonetheless, if it looks something like that of a typical republican tax cut plan, would it not be a fiscal stimulus to the benefit of US equity markets? Even if he were to achieve just one of those it would still have a profound impact on the respective markets. Therefore, as we explained in Trading the Trump factor 6 Junerather than trading broad risk assets in the event of a Trump win, we judge it is the US tradedependent currencies of MXN, CAD, CNY and Asia that would underperform. In terms of events to come, we properly the Democrats convention on July, but then it should be relatively quiet before the TV debates start on 26 September which should signal the more intense campaigning period. This is helping to provide a bid for the USD against major FX currencies. We expect the USD to continue to strengthen in the short term. A move below would open targets towards the range lows. AUDUSD downside range break lacks previous levels of activity. We expect a period of consolidation. A move below our initial targets near would signal lower towards and then the range lows. We are bullish in the short term and look for a squeeze higher in range towards the area, where we would look for signs of a top. The move above resistance near signals further upside scope towards the range highs. A small basing candle on Friday signals short-term upside towards the area. Overall, we prefer to fade upticks while the greater range highs near caps. A break either side of the would help to provide short-term direction. Our nearby targets area in the area. Beyond there, we are looking towards the range highs. A break below on increased investor volumes would encourage us to re-instate our bearish view towards next. We are bearish against the range highs. For now, we prefer to fade upticks against the range highs and look for a move back in range towards the lows. A break above however, would force us to abandon our bearish short-term view in expectation of a stronger upside correction. CNY depreciation has been easy so far thanks to USD weakness. However, if US data drive a further broad USD recovery, China will have to choose between stability vs. We think China would focus on the basket and move USDCNY higher. However, if the USD rally continues, China will be forced to reveal its hand. The CNY has fallen more vs. In the near term, if US payrolls data lead this broad USD rally to emerge sooner than we expect, stress around the CNY will probably rise over the next month or so. In contrast, if US data resume USD weakness, it would allow for a more benign scenario of continued drift in USDCNY and CNY depreciation vs. Looking across the various measures of the CNY exchange rate, our bias is to think that China is depreciating its currency, not keeping it stable. Figure 1 shows that the CNY clearly has been trending lower vs. The CNY has fallen 4. It has fallen through the 98 and 97 levels that many in the market expected to be the floor for the index if the policy objective is trend stability for the nominal trade-weighted rate. Additionally, the extent of this nominal depreciation leads us to estimate that the CNY has fallen to forex lowest level since last December on a real exchange rate basis even after accounting for the recent modest rise in Chinese CPI inflation Figure Volatility of the USDCNY fix has tended to be lower than volatility of the CFETS basket until very recently Figures 3 and However, if the government were managing on a basket basis with an objective being stability in the trend in the basket, vol of the basket should be lower than vol of spot. To be sure, in How, 3m spot vol is about 7. Admittedly, CNY spot vol has risen, so maybe things are changing. Perhaps the recent rise in fix vol and fall in basket vol indicates that the government has transitioned to targeting the basket, not the fix. We think this requires a stable or stronger CNY vs. Figure 5 shows that our estimate of corporate hoarding of foreign exchange, i. The risk here is of a resumption of a USD appreciation trend back to its highs, not just a small or temporary bounce. Perhaps the PBoC has been depreciating the CNY vs. This would allow it to keep USDCNY stable, at least in the early stages of any broad USD rally. However, we tend to doubt this explanation. One reason is that it would invalidate the whole concept of managing the CNY vs. Another is that if the USD TWI exceeded its past highs, China would have to accept CNY appreciation to new highs. In contrast, we think the most likely scenario would be that the PBoC would push USDCNY higher in order to try to prevent the CNY from appreciating vs. In this scenario, we estimate roughly that if the DXY were to return to its November high, USDCNY would need to rise to about to prevent appreciation on a basket basis. If the objective is further depreciation vs. USD weaker: Goldilocks continues. A stable or weaker USD-G10 would likely lead China to keep USDCNY stable or slightly lower in order to continue trend depreciation vs. A USD rally scenario would be most disruptive for markets, in our view. Yet market pricing of risk has CNY risk moderating slightly. Vol adjusted risk reversals have also been stable as vol levels have fallen. We think the best ways to position for CNY stress generated by a stronger USD are in proxies for the CNY, not the CNY or CNH itself. We expect the peg to hold, but if USDCNY rises significantly we believe the HKD forward points are likely to rise back to — as they did in January and February vs. Additionally, seasonal factors tend to be particularly negative for KRW in May. We expect slowing growth and moderating inflation in Singapore should push the SGD — 2. A resumption of an uptrend in USDCNY would likely accelerate this move in the SGD, in our view. In contrast, we believe the best way to trade the implications for the CNY of a resumption of broad USD weakness is by going short the CNY vs. We would expect the PBoC to continue pursuing CNY depreciation vs. Crucially, the more that the CNY depreciates vs. You can get Credit Suisse FX Strategist research as well as many other interesting analysis from leading investment banks via our subscription Forex AnalysisHow MarketForex Strategies May 6, If you wish to receive Nomura research reports on a daily basis and many other interesting analysissubscribe now or request a free 5-day trial We have constructed a monitor that tracks 1,961 correlations across markets see full monitor on second page. To strike the right balance between stability and relevance, we focus on three-month correlations of changes in market prices. It should help to gauge the relationships driving asset prices. In general, the dollar appears to be positively correlated with risk, and so the euro is the funding currency that is negatively correlated with risk. What matters is the tone of the statement but the Fed has painted itself into a corner. MXN and EUR shorts are dwindling away and only GBP shorts grew in the week to Tuesday. The current environment is very different of course, but anything which makes the markets price in a faster pace of rate forex than the current one hikes by the end of next year would be bad for risk sentiment and good for the dollar. However, I do think the CFTC data accurately reflect short-term market sentiment and as Japanese demand for foreign assets remains incredibly strong, we look for further yen weakness in the few weeks. Money supply data are due Wednesday and should be reasonably encouraging, while Q1 GDP data are due trade Friday, showing annual growth slowing to 1. Politically-inspired sterling shorts are being squeezed as a result, but the news that a major High Street retailer is in danger of administration is a reminder of headwinds facing the economy. Q1 GDP is likely to come in a 0. You can get Societe Generale FX Daily reports and various analytics from tier 1 institutions via our forex Forex AnalysisForex News April 25, If you wish to receive Morgan Stanley FX Morning pdf research report and many other on a daily basis, subscribe now or request a free 5-day trial Why JPY has further upside: We expect further flows from various market participants to continue to support JPY. Note that CFTC data showed the most net long positions building in the first four weeks of the year. Instead our client conversations focusing on the BoJ and its ability to weaken JPY are suggesting to us that the market has not fully adopted our view, suggesting JPY strength staying with us for even longer. Sovereign bond purchase-focused QE can no longer rely on the JGB yield curve acting as a transmission mechanism. Negative interest rates seem to undermine banks and monetary velocity, hence strengthening and not weakening JPY. The JPY-weakening impact of such BoJ equity purchases should be limited. Alternatively, the focus on increasing fiscal spending would require equity market investors to have more faith that Abenomics is going to work in order for JPY to weaken significantly. The likelihood JPY resumes its appreciation is high, but the higher JPY moves, the bigger are the carry trade liquidation pressures. Here we under line our trade again. The second-round effects of JPY strength would terminate the US D downward correction, especially against liquid high-yielding currencies with the EM spectrum. Within the DM world it might be AUD suffering most. The Chinese economy seems to be under going a cyclical rebound, while structural issues such as over capacity, low debt and investment multipliers have not been addressed yet. The question is how much of the good cyclical news has been priced in. The Fed-JPY link: We put special focus on AUDJPY, which offer s significant downside potential properly here should JPY-based investors pile out of carry trades. Another interesting factor driving AUDJPY down comes via the Fed and risk appetite. Markets currently under price our call for the Fed hiking rates in December. In addition, 1Q earnings will start to be released in the US today. Actual releases tend to surprise under whelming expectations. Should positive surprises disappoint relative to previous quarters then risk appetite may get hit. If not, it might be rising rate expectations that limit the equity mar ket upside anyway. Whatever the outcome, AUDJPY should receive little support from the risk appetite side of matters. Some may say this is part of the plan to bring the Conservative party back together but for FX trading it suggests two leading figures of the Brexit campaign increasing their political relevance ahead of the June 23 vote, increasing volatility in GBP. Our favoured way to play this week is to be long EURGBP. Our structural bearish view on AUD, based on weak nominal growth, a poor terms of trade outlook and a slowing housing market, is likely to lead to 50bp of cuts by the RBA by year-end. We propose selling AUDUSD on rallies but prefer to sell AUDNOK today. NOK has been fairly shielded during the ups and downs in the oil price recently because of the sovereign wealth fund, and the ability for the government to ramp up fiscal spending if needed may limit the negative impact on the economy relative to other commodity producers. Furthermore, domestic demand has mainly been supported by the housing boom, which we expect to reverse. Both would support the trade. The main risk for the NOK side this week is the lead-up to the OPEC meeting on April 17, with the probability of an agreement to cut production looking low for now. Evidence suggests that positioning in the Turkish lira has built up meaningfully since the rally in EM currencies started in late January. One concern is the considerable uncertainty over monetary policy in light of the upcoming appointment of the central bank governorwhich could come as soon as this week. The US money market curve is flirting with pricing risk of policy easing, a possibility the Fed Chair did no t dismiss outright in her Senate testimony even if she continued to emphasize it is properly her expectation. Essentially, we expect the fragile risk environment to preclude tightening in H1 and slowing activity to argue against further rate hikes thereafter. We expect the first estimate of eurozone GDP to show growth of 0. The CAD and AUD have held up better than might be expected this week, holding stable against a broadly weaker USD despite continued weakness in crude prices. Such levels, however, could prove to be unsustainable. The ECB policy will i. The risk of a significantly more expansionary ECB policy is not properly reflected in the FX market. For a long time the ECB was known as a central bank which was able to over-deliver compared to market expectations. This impression was destroyed by the December meeting. That, however, does not imply that the ECB will always and forever be a paper tiger. No wonder, as the exchange rate channel is the last one still functioning nearly normally. The FX market is largely ignoring this risk. EUR-USD risk reversals trade at elevated levels. This would certainly not create significant downward pressure on EUR-USD or other EUR exchange rates. This scenario still is possible. For the medium-term i. And I expect lower EUR-USD riskies again. Both oil economies have seen housing booms but Norges Bank now seems less worried about the risks as growth in the non-oil sector has stabilised GBP: Data to guide BoE: GBP has become less sensitive tooil over recent weeks, suggesting that the main driver is economic data and the impact that may have on monetary policy and investment in the UK. Watch out for the possible Republican convention bounce This week has seen the start of the Republican convention and Donald Trump formally nominated for president by the Republican Party. FX Chart Focus and Levels AUDUSD downside range break lacks previous levels of activity. A break above however, would force us to abandon our bearish short-term view in expectation of a stronger upside correction You can get Barclays technical analysis research as well as many other interesting analysis from major investment banks via our subscription Technical AnalysisTrade Ideas May 9, Credit Suisse Trade Strategist: Moment of truth? If you wish to receive Credit Suisse FX Strategist pdf research report and many other on a regular basis, subscribe now or request a free 5-day trial Credit Suisse FX Strategist research: Moment of truth? Additionally, the extent of this nominal depreciation leads us to estimate that the CNY has fallen to its lowest level since last December on a real exchange rate basis even after accounting for the recent modest rise in Chinese CPI inflation Figure However, three factors create uncertainty For all of the talk of a new FX regime, USDCNY is essentially flat year-to-date Volatility of the USDCNY fix has tended to be lower than volatility of the CFETS basket until very recently Figures 3 and However, if the government were managing on a basket basis with an objective being stability in the trend in the basket, vol of the basket should be lower than vol of spot. How to trade this? USD rally scenario A USD rally scenario would be most disruptive for markets, in our view. A resumption of an uptrend in USDCNY would likely accelerate this move in the SGD, in our view USD weakness scenario In contrast, we believe the best way to trade the implications for the CNY of a resumption of broad USD weakness is by going short the CNY vs. Our favoured way to play this week is to be long EURGBP Trades of the week G10 — Sell AUDNOK Our structural bearish view on AUD, based on weak nominal growth, a poor terms of trade outlook and a slowing housing market, is likely to lead to 50bp of cuts by the RBA by year-end. We like to sell AUDNOK at market with a target of and a stop at EM — Buy EURTRY Evidence suggests that positioning in the Turkish lira has built up meaningfully since the rally in EM currencies started in late January. Soft Q4 GDP growth in Europe adds to pressure on ECB We expect the first estimate of eurozone GDP to show growth of 0. Commodity currencies could follow USD lower The CAD and AUD have held up better than might be expected this week, holding stable against a broadly weaker USD despite continued weakness in crude prices. If you wish to receive this Commerzbank research report and many other on a daily basis, subscribe or request a free 5-day trial How much upside potential does EUR-USD have? The risk of a significantly more expansionary ECB policy is not properly reflected in the FX market For a long time the ECB was known as a central bank which was able to over-deliver compared to market expectations. Home Forex Charts Economic Calendar Forex Books Currency Codes About Us Contact Us Subscribe Get 5-Day Free Trial Subscription Try now!
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