Tuesday, 12 November 2013

Currency Wars Spark Bullish Dollar Opportunities

Steven Randolf, Excel Analyst

Have you had a chance to look at the Dollar index these days? It had slid 7% from the July 10th high of 85 to the October 24th low of 79 as the Fed continued to print 85 billion dollars each month to buy government bonds without taper. But then with a doji bar on October 25th, the dollar regained its footing, and has lept into a recovery mode from 79 to the 81.16 of Monday, 11th November.

Click to Enlarge DOLLAR INDEX (DX) Daily Forex Chart

The US Dollar recovery happened because the the central banks around the world became anxious when they saw their respective currencies strengthen by 7-8% against the dollar in the space of 4 months, causing them to think they too needed a looser monetary policy and weaker currency to recover and survive in the global future.

This competition for a weaker currency is the main argument behind Jim Rickard's book Currency Wars, wherein he asserts that countries around the world are devaluing their currencies in order to boost their exports (domestically produced goods and services become cheaper for foreigners) and thereby increase their GDP. 

The US is devaluing its own currency with its current QE program, but when the dollar index sank to 79 in late October, many central banks voiced their anxiety about their currency reaching uncomfortably high levels against the dollar, and the Euroepan Central Bank became frightened enough to lower their interest rate from a very low 0.5% to an even lower 0.25% on November 7th.

This devaluation retaliation by the ECB pushed EURUSD lower last week, causing a chain reaction on the majors to also fall against the dollar. There is now growing speculation that the ECB's looser monetary policy will trigger looser policies with other central banks, which could trigger dollar strength across the board.

EURUSD rose 8% from July 10 to October 24th, putting enough fear into the ECB to cut their rates down to 0.25% on November 7th. Our EUR/USD sell momentum signal was generated at 1.3488 on 1st November 2013 and it is now 80 pips from entry, aiming for 1.3100 (288 pips).

For the first 3 trading days following the entry, the price floated near the entry price, but with the ECB lowering their interest rates from 0.5 to 0.25 on November 7th, there was a sudden drop on the currency, breaking down through the trendline resistance at 1.3370 to a reach a low of 1.3294. It has since rebounded over 100 pips to 1.3405 of today, but the bearish trend is still in play and and short trades can be taken anywhere in the 1.3400-1.3450 region for a retest and breakdown below the 1.3294 low to ultimately reach 1.3100 support.

Exit if close crosses above 0.3550.

Click to Enlarge EUR/USD Daily Forex Chart

The Swiss National Bank (SNB) had already reported back in July that they felt their Swiss Franc was overvalued by 15% relative to the US dollar, and then from July 10th to October 24th the USDCHF rises by 8%, in the opposite direction they had hoped for.

Our USD/CHF buy momentum signal was generated at 0.9122 on 1st November 2013 and it is likewise 80 pips from entry, aiming for 0.9325 (200 pips). Like EURUSD, the first 3 trading days it floated near the entry price, but with the ECB lowering their interest rates on November 7th, the pair rocketed to a high of 0.9250 before retracing back down to 0.9190 as of Monday, 11th November.

Once the pair breaks out of 0.9250 resistance it can reach the 190-SMA now at 0.9325. Exit trade if close closes below 0.9100.

Note: According to a gauge of purchasing power parity (PPP) by the OECD, the Swiss Franc is 66 percent overvalued against the greenback, so the USD/CHF has plenty of room to move up if we enter into a bullish dollar phase.

Click to Enlarge USD/CHF Daily Forex Chart

GBP/USD rose 9% from July 10th to October 24th, undoubtedly making BOE uncomfortable with Pound strength. Our GBP/USD sell momentum signal was generated at 1.6046 on October 29th, and it is now 50 pips from entry, aiming for a 1.5700 (375 pips). Unlike the previous two pairs, it did not fall hard on November 7th, but it did fall the following day, after retesting resistance at 1.6100.

Once this pair takes out trendline support, now at 1.5900, it will move down to test 1.5700 support. Exit if close crosses above 1.6150.

Note: While 9% is the largest rise of any of the other majors, It is possible that good news for the unemployment rate on Wednesday could push GBPUSD back up to 1.6100.

Click to Enlarge GBP/USD Daily Forex Chart

AUD/USD rose 6% from July 10th to October 24th, undoubtedly making RBA uncomfortable with Aussie strength. Our AUD/USD sell momentum signal was generated at 0.9383 on November 8th and it is now 25 pips from entry, aiming for 0.9000 support (383 pips).

The momentum sell alert was triggered at the same time when price broke down through rising trendline support at 0.9444. Exit if close closes above 0.9500.

Note: According to a gauge of PPP by the OECD, Australia's dollar is 43 percent overvalued against the greenback, so the AUD/USD has plenty of room to fall if we enter into a bullish dollar phase. 

Click to Enlarge AUD/USD Daily Forex Chart


NZD/USD rose 8% from July 10th to October 24th, undoubtedly making RBNZ uncomfortable with Kiwi strength. Our NZD/USD sell momentum signal was generated at 0.8241 on November 8th and it is now -15 pips, aiming for 0.8100 support (141 pips).

The momentum sell alert was triggered at the same time when price broke down through rising trendline support at 0.8264. Exit if price crosses above 0.8300.

Note: According to a gauge of PPP by the OECD, New Zealand's dollar is 29 percent overvalued against the greenback. RBNB Governor Graeme Wheeler has cited the risk of slow inflation and currency gains as reasons for not raising the nation’s official cash rate from a record-low 2.5 percent this year, even though a rise is needed to tackle the overheated housing market.

Click to Enlarge NZD/USD Daily Forex Chart

The above signals are all technical momentum signals, but they are buttressed upon the idea that the ECB's rate lowering will have a domino effect on all other pairs, causing investors to anticipate that central banks across the spectrum will loosen their monetary policy and devalue their currency pairs according to the currency wars playbook.

It seems like a 4-month increase of 8% over the US dollar was too much for central banks to grin and bear it, and there might be a 1-2 month period correction back to June prices.

Strategy

Signal
Momo Sell Signal on EUR/USD,
Entry Price: 1.3488
(Generated at Nov 1, 5:00 PM EST) 
Momo Buy Signal on USD/CHF,
Entry Price: 156.70
(Generated at Nov 1, 5:00 PM EST)
Momo Sell Signal on GBP/USD,
Entry Price: 1.6046
(Generated at Oct 29, 5:00 PM EST)
Momo Sell Signal on AUD/USD,
Entry Price: 0.9383
(Generated at Nov 8, 5:00 PM EST)
Momo Sell Signal on NZD/USD,
Entry Price: 0.8251
(Generated at Nov 8, 5:00 PM EST)
Strategy Logic
·   29-Momentum
·   165-SMA
·   20-Price Channel
·    31-Momentum
·    190-SMA
·    21-Price Channel
·   15-Momentum
·    28-Momentum
·    95-SMA
·    14-Price Channel
·   21-Momentum
·   110-SMA
·   10-Price Channel
Stop Loss
Cross above 1.3550
Cross below 0.9100
Cross above 1.6150
Cross above 0.9500
Crosses above 0.8300
Take Profit
1.3100 (288 pips)
0.9325 (200 pips)
1.5700 (375 pips)
0.9000 (383 pips)
0.8100 (141 pips)
Download
 

All trade ideas and strategy setup suggestions found on ForexRazor.com are hypothetical. ForexRazor.com has not placed these ideas in a live trading environment. Forex Trading involves high risks, with the potential for substantial losses that exceed your initial deposit and is not suitable for all persons. Past performance is not necessarily indicative of future results.
Facebook Excel Markets Tweet Excel Markets Reddit Excel Markets Digg Excel Markets

No comments:

Post a Comment