It is good practice for me to regularly revisit all the major factors influencing the instruments that I trade and see if anything has changed and if I should be adjusting my approach. Market positioning, fundamental indicators, technical analysis and risk factors will all have a significant bearing on what moves and on how far it moves.
‘Tis the weeks before Christmas, and we all know what that means, position reduction in increasingly illiquid markets. In the FX markets, one of the biggest shifts in positioning in 2021 has been in USD/JPY, with a significant move from lows near 102.50 in early January to highs at 115.50 a few weeks ago. USD/JPY could well be renamed the ‘inflation expectations’ trade with a pinch of oil prices thrown in. With both of these variables moving in the same direction, it’s little wonder that USD/JPY has risen as well. This has happened in the face of regular ‘risk-off’ Covid-related headlines which goes to show just how powerful the trend has been. But, it’s December and traders/investors will be sorely tempted to book some profits or leave trailing stop-loss orders below the market so my instinct in this case is to play the contrarian card. The Fed has spoken and the news that rates will likely rise in the US sometime in mid-2022 is already written into the USD/JPY price so barring any major spikes in oil prices, I don’t really see any major short-term risk higher.
The market loves a possible Head&Shoulders formation so the trade I like here is to sell on the approach to 114.50 and add on a failure, looking for a move back towards 110.50.
Cable is probably my favourite pair to trade in the FX market as it usually gives you chances to trade out of bad positions. But I’ll say it again, it’s the weeks before Christmas and this pair can move very fast indeed. Macro positioning is still thought to be slightly long although we must always temper these types of market predictions with the fact that no-one actually knows the true extent of speculative positioning in the FX space. Recent UK economic data has been decent and with UK interest rates expected to start rising early in 2022, there should be some optimism for the pound but that’s not what the price action is telling us. The risk factors such as Covid/Omicron and supply chain worries seem to overly affect the GBP and the short-term risk for cable does seem to be to the downside.
I am looking to sell rallies towards 4-hr resistance near 1.3350 in expectation of a pre-Christmas sell-off below 1.30.
It would be logical, as I’m basically bearish GBP/JPY, that I would at the very least be neutral (if not bearish) on USD/CHF, but that’s not the case. This is one pair where we can be very confident of overall positioning. Despite the interest rate situation, we see massive amounts of hedging/security buying of CHF and this has been going on for years. The big question is, will this buying continue or will a black swan emerge and send this hot money scurrying back to where it came from. With this in the background, it’s impossible for me to be comfortable about being short USD/CHF so I basically leave it alone until such time as I see a good reason to buy it. Not very open minded I know, but we all live with our ingrained biases.
The AUD/USD touched .7000 last week on risk-off sentiment but has rebounded after the RBA statement and less-apocalyptic Omicron headlines. As we all do, I remain hopeful that this latest Covid strain is less severe than the last, but in regard to the RBA, I’m not sure that it’s overly AUD positive. QE does seem likely to be significantly tapered possibly as early as February 2022, but the overall tone of the statement was still dovish and with Australian household debt at increasingly high levels, it’s hard to see the RBA raising rates anytime soon.
The 21-day MA has often proven to be a very reliable indicator for the AUD/USD, so my preference is to sell rallies towards .7205 with expectations of a re-test of last weeks lows at .7000.
Finally to the EUR, which has been having a bit of a tough run of late across the board. This is despite increasing murmurings from the ECB that they have doubts about how quickly inflation could fall once the special Covid circumstances have changed. There are of course other factors at play including tensions with Russia regarding Ukraine so my preference is to avoid EUR/USD for now and possibly look for intraday trading opportunities in the EUR crosses.
A quick look at the long-term chart shows a bearish cross on the weekly MAs with resistance now firming at 1.16 and potential for a fall towards 1.09. Based on present risk, fundamental, technical and positioning factors, I find it unlikely that we will break out of this range in the next 3-6 months.