The fizz has gone out of forex land over the past month. Currencies have traded a range, reflecting the overall view on either an appetite for, or an aversion to, risk. One thing’s for sure, this phoney war won’t last.
What’s going on in the currency markets? For the first time in ages I’m struggling to find an angle. I’d find it easier writing a piece on True Statements By Gordon Brown or The Cultural Importance Of Eurovision.
Frankly, it’s not happening down Forex Street. You want a view on the Dollar? OK, are equities going up or down? The Yen? Same answer. The Euro and Sterling? OK, there’s a bigger ‘catastrophe element to the UK, but if risk appetite is back on the menu you’d be brave betting against those two.
The same goes for the Canadian and Aussie Dollars, whose fates are tied to the illusion of recovery and rising commodity prices.
But the currency markets don’t rest for long so it’s well worth having a poke around to see if there are any clues in the charts.
What’s The Dollar Been Up To?
Let’s start by checking out the Dollar trade-weighted index:
Last month the index looked to be breaking free of its recent downtrend. Technically it happened, but the party never really fired up and we settled for a month of mediocrity. Now, if I’m really looking for clues, there’s a trace of blue below the uptrend line, suggesting a further fall in the greenback is on the cards.
Does Heat Affect The Dollar?
The seasonal chart, supplied by seasonal-charts.com shows a tendency for the Dollar to fall in July and then recover in August before selling off during the autumn.
This chart shows the EURUSD price (taking the DM as a proxy before the Euro was born), but the pattern is the same for the GBPUSD rate and is supported by the Dollar TWI, which shows a seasonal weakness in July.
GBPUSD
Yes, I’ve flip-flopped from being bullish to bearish and back again on this one, but I’ve not been alone. Check out the chart of indecision over the past month. If I was feeling charitable I’d credit it with a generous 600-pip trading range, but it hasn’t always been that straightforward.
To be fair, trading this pair has kept my kids in cider and salmon fillets for the month so I can’t complain too much. But I felt more at home trading May’s more obvious trend than the random movements of the past few weeks.
There’re a few bullish signs at the moment. For starters, there was a decisive bounce off the twin support of the 50-day MAV and the trendline dating back to April. Yesterday’s move broke and closed above the flattish 21-day MAV and the RSI is a healthy 55. Often a break and close through the 21-day MAV leads to an extended move to the Bollinger band, which would suggest another attempt at $1.66.
Also, note how the Bollinger bands have tightened recently. It’s not magic, it’s just reflecting the reduced volatility, but tight bands are followed by a widening as the price breaks out. If I had to put money on a move (and I often do) I’d back a move higher. However, the massive caveat is ‘depending on the stockmarkets’.
EURUSD
It’s not surprising that this chart has many similarities to the GBPUSD chart. The price was well supported by the 50-day MAV/ trendline combo and recent interest has taken the RSI up to 55. Yesterday’s trade saw the price ‘gap’above the 21-day MAV and shake hands with the upper Bollinger band.
The Bollingers demonstrate a similar trait, tightening over the past month with a breakout favouring the upside. First though, the price has to deal with a downtrend line, which is pretty much where it ran out of steam last night. After that there’s a sticky patch around $1.4180 and then a retest of June’s high at $1.4330.
GBPJPY
Here’s another chart I’m watching. Once again it incorporates a view on the stockmarkets. In his Balls Of Steel blog yesterday Flash said that he was running long of the carry trades (he’s bullish on risk appetite so has been selling the Yen to buy an assortment of Sterling, Euro and Aussie).
Given my more bearish tendencies I ought to be looking to sell GBPJPY, and I must say that I’m looking for clues to put the trade on. However, I trade equities and forex differently (the forex is more successful!).
For starters I rarely take a fundamental view on currencies; I rely far more on the technical signs. Furthermore, whilst I’m (reasonably) relaxed with running a losing position in equities, I’m far tighter on my forex risk. I’ve seen the speed and scale of the moves and don’t fancy being on the wrong side of them too often. So I’m not going to jump the gun on this trade; I’ll watch the chart for clues.
And at the moment the chart’s throwing up some interesting points. The trend support line is now acting as resistance. The price broke through the 50-day MAV barrier, but couldn’t take out the downward-sloping 21-day MAV. Yesterday’s bullish candle is reversing this morning, falling back below the 50-day MAV.
How Am I Trading It?
I’m trading very cautiously at the moment; I’m not trading the forex markets much, and when I am I’m using smaller bets and tighter stops until I can recognise a stronger trend.
This morning saw a retracement in GBPUSD back below $1.64, and an early test of the 21-day MAV. This held firm and now, following JP Morgan’s results, the price is pushing on $1.6450. This shows why it’s so tough to take an independent view just at the moment.
The GBPJPY pair is often a big win/ big lose trade so I’m not going to pre-empt the next move. A close below Y153.11 will engulf yesterday’s green candle giving a bearish sign; a close above the 21-day MAV at Y155.30 will get me looking at a buy trade.
By FT on July 16, 2009 in www.dailymarkets.com
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