Trading Desk Notes October 19, 2019Submitted by Polar Futures Group on October 18th, 2019
Currency market trends often go WAY further than you can imagine...they develop a self-reinforcing momentum (which we used to call “Leads and Lags”) and then they turn on a dime and go the other way. I’ve been generally US Dollar bullish for years...but recently I’ve started buying other currencies against the USD...thinking it may be making an important turn lower.
If indeed the USD is making an important turn then there will be wonderful trading opportunities all across the currency markets...and a lot of other markets will be impacted as well. For instance, if the USD is falling Emerging Markets should do better, all other things being equal. A weaker USD often means higher prices for commodities...and a weaker USD boosts the foreign earnings of American companies.
The USDX hit a 28 month high at the beginning of October and then turned down...the broad St. Louis Fed Trade Weighted USD Index hit an All Time High in early September and has rolled over a bit since then.
I’ve been long EUR for the past couple of weeks. As I noted last week EUR has been a dog Vs. the USD, CHF and JPY for nearly 2 years. I believe that the enduring negative sentiment on EUR has created a situation whereby EVERYBODY became bearish EUR...that is speculators, investors, analysts, even the treasury departments of companies with FX exposure to the EUR. (For instance, Google “leads and lags” and you’ll get an idea why the treasury folks at a German car exporter may have “lagged” or delayed converting foreign currency receivables into EUR...thereby exacerbating the negative trend in the EUR.)
EUR might be experiencing a “short-covering” rally against the USD, CHF & JPY simply because it was “sold out.” The narrowing interest rate spread between the US and Germany may have triggered the EUR buying...the turn-around in Brexit sentiment, which has buoyed the GBP may have given the EUR a lift...whatever the “spark” was (if indeed there was any “one thing” that caused a turn) EUR has been rising for the last 3 weeks and it may continue to do so.
I bought the EUR but not the British Pound. I would have had a bigger “win” being long the GBP but the risks would have been substantially greater.
I also bought NZD last week...futures market data shows it has a HUGE speculative net short position which I thought left it vulnerable to a sharp short-covering rally. I was stopped out of the trade early in the week and wasn’t nimble enough to get back in. Trading is not a game of perfect!
I prefer using the futures markets to trade currencies but you can also execute trades via ETFs, online spot FX platforms and through the interbank market. Please give us a call or send us an email if you'd like to know more about trading futures.
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