By Martin Tillier
I must stress that the following, while it deals with market specifics, should not be taken as individual investment advice. It is simply me sharing my general views for educational purposes.When planning this week’s article for The Tycoon Report, it occurred to me that, as I tend to do in conversation, I have wandered from the point somewhat.
One of the things I love about following and trading currency markets is the mile high perspective it can give on shifting capital and therefore on other markets, but Foreign Exchange was the reason for my being here in the first place.
A quick review of the major currency pairs may be somewhat overdue.
Most of you, who don’t trade currencies intraday, will be looking at long term trends, so I have used charts covering the last year with 1 day time periods.
I wrote a few weeks ago that my view of EUR/USD had changed. I had become bullish based on the usual reliability of the ECB as a contra-indicator and their talk of a lower Euro. Sure enough, EUR/USD is higher since then, but resistance at the 1.34 level has held, and staying in the range now looks more likely.
In the coming weeks (days or weeks are an eternity for spot FX guys), a move back towards the bottom of the range at 1.28 looks likely. At these levels, a stop loss at around 1.3470 to guard against a break out to the top side would limit the risk.
Over an even longer period, I would expect the Euro to resume its upward path, so selling now with an eye to buying later would be the basic strategy.
It pains me to say it, but the currency of my native land, the “proud pound” also looks to be near the top of a range, and about to fall out of bed.
If anything, I like this short more than the EUR/USD trade. I don’t think we will drop all the way back to challenge 1.48, but a move to around 1.51 would give an opportunity to ensure a profit from a short position and think again.
USD/JPY has, I will admit, been disappointing to me. I fully expected the second move above 100 that we saw last month to be decisive, and for a break of 103 to signal new highs. I was wrong, and I guess now is a good time to admit it. At least if you had bought at around 98.50 anticipating that and held on to your position, unloading now doesn’t cost too much.
Evidence of lurking inflation in Japan has caused the market to doubt the longevity of full throttle QE, and therefore caused the Yen to strengthen. It is hard to escape the conclusion that a test of 94 is more likely from here than another run up to the round number.
General Conclusion:
So... we have an outlook for EUR/USD, GBP/USD and USD/JPY to all fall. Those experienced in forex or any interdependent markets will likely sniff a contradiction here. If EUR/USD and GBP/USD are both falling, this would indicate a general strengthening of the dollar. If USD/JPY falls this would indicate dollar weakness, so which is it to be?
Quite simply, both! There is no reason why, as the USD weakens against the Yen it can’t strengthen against the EUR and GBP.
The trade to best take advantage of this would be to be short either EUR against JPY or GBP against the Japanese currency. I said above that I like the GBP/USD short the most, so, to me, short GBP/JPY looks to be a reasonable bet.
You would be looking for a move to fill the gap created back in April, and if both Cable and USD/JPY do fall, this could happen pretty soon. That is one of the characteristics of crosses; moves can develop with remarkable speed. This, combined with less liquidity than in the majors, means that a long term trade in a cross, such as GBP/JPY, would be made with minimal position size.
I have said before that one of the advantages or learning about and trading Forex is that it helps you to look for and better understand the relationships between different markets. The current situation is a case in point. An analysis of three major currency pairs leads to a conclusion that trading a different market may be your best option.
To quote Forrest Gump, an overall analysis of major pairs in currencies is “...like a box of chocolates; you never know what you’re gonna get.” You start out looking at EUR/USD and end up creating a trade idea for GBP/JPY. Forex may be many things, but it’s rarely dull.
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Martin Tillier has a wealth of experience in Foreign Exchange. He started working for a major interbank Forex broker in London in the 1980s, rapidly acquiring more responsibility and the authority to run larger positions. After several years, he was asked to go to Tokyo to develop the cable (USD/GBP) desk there. He returned to London at a time of turmoil in European currency markets and helped build the company's Sterling Mark (GBP/DEM) desk into the world's most profitable, in the years leading up to the Euro. Highlights included a 36 hour unbroken stint at the desk during black Wednesday, when the Pound was forced out of the European Monetary System. Because of his success in London and his ability to teach new recruits the complex world of Forex trading, Martin was asked to establish Spot FX desks in new markets for the company, first in Moscow, Russia, then in Warsaw, Poland. He left the market in 2002 and moved to the US, following the loss of a family member in the tragic events of September 11th 2001. He spent some time out of the markets, starting and running a successful wine store, but the lure of the financial world was still strong, leading to him selling that business and accepting a position as a financial advisor with a major firm. The frustration he felt while there is what led him to his current position as a writer and educator on markets, particularly Foreign Exchange. The markets were more accessible than ever, but it seemed Wall Street was still doing fine. It was obvious that the retail trader and investor were at a disadvantage, and education could close that gap. Martin now writes regularly for Nasdaq.com and other financial sites, trades Forex and other markets successfully and, in his spare time, plays golf badly. |
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