Pay attention to FX
You should pay attention to currencies, even if you don’t trade them. The currency markets dwarf commodities and equities in size, which is why foreign exchange flows are so crucial.
Premium users of SpreadCharts are aware that we've been bullish on the US Dollar for months. We have built a massive position between 101 and 102 through a T-Bill ETF, which has been paying off nicely. We also alerted you to tactical opportunities in the Polish zloty and Canadian Dollar, both of which have turned out fantastically.
But how much steam has the Dollar left? There is no universal answer because it depends on where you live or, more precisely, in which currency you’re denominated.
For Europeans like myself, the Dollar will likely remain an attractive currency for quite some time. The Euro is on the verge of breaking down, and we don't need to delve deep into the structural issues plaguing European industries to make this point.
Moreover, despite its recent weakness, large speculators are refusing to abandon the ship and are sticking to their sizable long positions. Don’t expect a sustainable bottom as long as this remains true.
But if you’re Japanese, for example, the perspective might be different. There are no speculators piling into Yen. Quite the opposite, the large speculators are heavily net short the Yen.
But currency markets are complex. Drawing conclusions based solely on positioning can be misleading. This is especially true for the Japanese Yen, given the yield curve control by the BOJ. This is no place for detailed macroeconomics study. It suffices to say that we're closely monitoring the Yen's response to the approaching support level.
Nevertheless, we expect the US Dollar to beat the majority of currencies going forward. This is the big picture to keep in mind. Of course there will be numerous counter-trends and mean-reversions. One currency we’re watching closely is the Australian Dollar. It recently hit our 0.64 target that we mentioned in the Quarterly macro outlook at the beginning of July. While 0.64 is a strong support, 0.62 is even stronger and we see a decent chance it will get there.
Truth be told, we’re not interested in playing the Aussie. However, it is correlated with certain commodities we’re watching closely. If you follow the premium research on SpreadCharts, you know what we’re talking about.
The sentiment on Aussie Dollar, measured by the speculative net traders indicator, has declined to a level where the AUD has at least bounced in the past. It remains to be seen if history will repeat itself this time.
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Disclaimer
All information in this post is for educational purposes only and is not intended to provide financial advice. If any financial instruments, strategies, securities, or derivatives are mentioned anywhere in this post, it is solely for educational purposes.
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