Theory Into Practice: Taking The Guesswork Out.

 

Following on from our live session on Tuesday and my blog on Monday,  our task, when we seek high probability opportunities, is not to guess what price is going to do, but understand what drives it, what affects it and how to use the information. Remember also, when you see a chart or this or that indicator, it follows the fact and more particularly, reflects human behaviour.

Neither can we guess what the fundamentals are going to do. Will Trump’s tax reform succeed, will NFP beat or miss the expectation tomorrow, will Catalonia cause the decline of the Euro-zone…or at least a weakening of the currency? We have no idea…we just as well might toss a coin. It is not a question of trading news as it comes, it is being prepared for the consequences that count. So that means first understanding exactly how economic data affects a currency, what easing and tightening mean to it and how yields predict currency strength or weakness. Then there is crowd sentiment…do the investors and the traders have risk appetite or aversion?

These are the subjects I cover in the bi-weekly blogs and as far as the basics are concerned it is not as difficult as some would think. This has been a heavy news week, so today we will have a brief look at the scores so far, while we brace ourselves for NFP.

There have been many temptations this week…My biggest has been a short in the NZDUSD:

 

Not quite there and now a bit close to NFP.

The US has had some strong data with ISM data this week both manufacturing and Non-manufacturing soundly beating the estimate.

What does the yield say?

The critical area has been tested and not quite clear enough to signal the break downwards …which would raise the yield and support a move in the USD. I still have a slight bias for USD strength in the short term, but I am prepared either way. And I will wait for NFP.

And the index,

 

 

The AUDNZD: I’m watching this:

 

 

Still on the long list and interesting on the weekly. this is also somewhat NFP proof…as far as anything can be!

I am still looking to get back into the AUDUSD short, having taken profit before the RBA decision. The AUD retail data was very poor yesterday slipping to -0.6% and missing the estimate.

Post NFP I am watching the 0.7913 area for pullbacks.

The RBA was mixed in outlook, both cautious about debt especially in housing and stagnant wage growth, but much more upbeat on inflation. Another balanced view but they have dovish lean. They are also affected by China and the data we see from there.

USDSGD

If the US scenario works out to the long side, this is another US long trade and we can only pick the best so as not to overload the risk on USD:

 

EURGBP

This is so confused, both seem weak right now, so this is not for me. There is the added problem of the UK political situation domestically with may hitting lows in popularity after a disastrous Conservative party conference.

Gold

This works in the alternative scenario of either fear as a consequence of geopolitical tensions or US weakness. The weekly support is in focus but it needs a fundamental driver:

 

JPY trades will e interesting if we see risk-off conditions. This is the favoured pairing is the AUDJPY in those conditions, that is to say, this is a scenario I am prepared for but not now!

NFP will often provide the catalyst for the USD so we will know what scenario is appropriate for next week. There are a few to watch such as the AUDNZD  but we need to be very cautious until after Friday’s data.

S&P500

Yes, it is on the watch list shorts only, not ready yet (!) and like a veritable Duracell bunny, it keeps going and going! It is vulnerable to a more hawkish Fed, risk-off on geopolitical issues, and bursting bubbles, but again it is not for us to guess where or when…just keep alert to the news and know what to do if it starts to break. The ultimate alternative scenario prep! I shall be looking at some European equity possibilities next week.

I cannot emphasize enough why the USD is so unpredictable right now, and it’s not just NFP… the appointment of the FOMC chair can bring with it important implications on future policy. Interesting yesterday to see Yellen speak without talking policy.

As always these are my own trading ideas and outlooks and not recommendations. I welcome comments and questions below. We always wait for a trade to come to us, having prepared our levels beforehand and have to accept that there are just some weeks where it is better to sit it out…and, for me, this is one of them.

Judith Waker