This post is the first in a weekly series of Forex market analysis. As an avid market-watcher and trader, I am always looking back to see what happened and looking forward to consider what might happen. An interesting twist on my market analysis is adding the Currensee social analytics and seeing how the trader network performed and what they'll be thinking about in the week ahead. I welcome your thoughts, comments and suggestions on how to make this unique analysis more valuable to you. So, without further delay, let's talk about this week in Forex trading.
Another big week ahead for traders with many top events to look forward to including Friday’s Employment report out of the US. There are also a slew of central bank meetings around the globe and although there may not be any major surprises this may present the stage for one or more of the central banks to hint that their ultra low rate policy is nearing an end.
Of course May will be remembered for the continued positive impact from the reflation story as most stock markets turned in positive performances and foreign currencies such as the Euro, Gbp and NZD made sizable gains versus the dollar with Euro/$ closing above 1.40 for the first time since last August.
Though, that doesn’t mean it’s been a one-way move in the markets. In fact, when I look at the Currensee strategy set-ups, the trading strategies that have produced the best results of late have been more defensive strategies. One such member strategy is a “Pairs trade” which is a market neutral strategy that places an emphasis on the correlations of currency pairs. Another successful member strategy is one that focuses on divergence in stochastics with momentum considerations.
Back to the importance of the Employment report, one could argue that the gains in many foreign currencies last month, such as the Euro and Aud, can be attributed to two economic reports: 1) the better than expected NFP report back on May 8th and 2) the more recently released and much improved Consumer Confidence report. This only lends confidence that the worst of the recession is now behind us and the US consumer is as resilient as ever.
Initial expectations for this Friday’s report are for another loss of 530k jobs with the unemployment rate hitting 9.2%. Will we see another report that shows a reduction in layoffs, or as some traders expect, will this report disappoint the markets? Traders at Currensee as of right now are expecting a disappointment as 75% remain short EUR/USD thus not all are convinced that the US economy is improving.
Of course there are plenty of economic events ahead of the NFP that will grab trader’s attention including the latest PMI and Service PMI (or ISM) readings in many of the industrialized countries.
As we previously mentioned, not to be discounted, will be the outcomes of a few central bank meetings this week. This includes the Bank of England and the ECB on Thursday. Although expectations will be for an Unchanged outcome from the ECB, comments from Gov. Trichet’s press conference will as always be closely watched for any hints on his and their level of concern of inflation in the Euro zone.
The Bank of England has had its bank rate at 0.5% since March. Last month they stated that global demand was “weak” but they also were expecting a recovery in due course as they state there is plenty of ‘stimulus in the pipeline’. Similar to EUR/USD, the vast majority of traders on Currensee remain Short the GBP/USD currency pair. Cable traders will be certainly be paying close attention to any signs that the Bank of England will not remain in an ultra low rate policy for too much longer.
Not to be outdone on Thursday will be the Bank of Canada interest rate decision. They cut their repo rate to 0.25% in April thus the duration of their ultra-low rate policy will be in question going forward.
One currency to keep in mind this week will be the Australian Dollar (AUD). It’s up approximately 30% versus both the USD and JPY this year as the RBA has kept their base rate far above their peers at 3%. Thus although they have more than halved rates since last summer the currency has exploded this year. As a country that relies heavily on commodities, which have been flying high of late, will the RBA start to signal that they are becoming uncomfortable with the prospects of higher inflation this week? Or is it time to take profits on long positions as a strategy that utilizes momentum divergence, such as MACD, signals that this upward move is losing strength?
Either way, look to see how traders react on Currensee this week. Until next time, happy trading.
Be sure to read the full risk disclosure before trading Forex. Please note that Forex trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved before trading. Performance, strategies and charts shown are not necessarily predictive of any particular result. And, as always, past performance is no indication of future results.