These forex markets are great at the moment! As another eventful week draws to a close the dollar appears to be regaining ground lost at the start of the week when economic releases from the US pointed to slower growth and reduced inflationary pressures.
But my feeling is that the greenback’s bounce is more to do with short-term profit taking on short positions, rather than any lasting dollar trend.
It’s perhaps understandable that during the peak holiday season operators will look to make short-term gains rather than “get married” to a longer term trade.
What else has been going on in the currency markets?
News today that the People’s Bank of China has unexpectedly raised rates has once again cast the spot light on the Yuan and other Asian currencies.
This attempt by the Chinese central bank to cool what is an already overheated economy will probably require further rate increases before the end of the year. This will place more short-term pressure on Asian currencies.
However, it is worth remembering that buying yen for example as a substitute for Chinese currency strength looks unlikely to work. Sadly it’s an old story that has been told too many times already – I know I’ve retold it many times myself.
A bad week for gold
The ceasefire in the Middle East tended to put a dampener on dollar demand during the early part of the week as it also had a negative impact on the price of oil and gold, both of which are yet to recover. The market looks like it’s massively long of both commodities and they are likely to fall on the sword in the absence of any fresh buying demand.
Next week is a pretty quiet week for economic releases with little for the markets to trade off. It’s also the busiest holiday week of the year. That will make for some rapid, volatile moves – time for caution.
We were long of cable (GBP/USD) until yesterday when I advised closing the position after the release of much worse than expected UK retail sales for July. As I mentioned earlier, this decision has proved to be right in the short term as sterling has traded nearly 200 pips lower since then.
Why we’re not short sterling
So shouldn’t we have also gone short yesterday to cash in on the fall? Of course, that would have been a great addition to the 45 points we banked. But let me explain.
My fundamental view is that sterling will strengthen versus the dollar. That is the prevailing trend: dollar down. I have, for several days now, been writing in my reports why I believe the pound will trade higher.
I will never advise trades that go against what I perceive to be the trend... unless there is a really good reason for it. Occasionally there will be a very good case for a “contrarian” play.
I will be looking to enter into another long sterling trade at a lower level versus the dollar. This is likely to be nearer the 30-or 90-day moving averages (currently 1.8675 and 1.8520 respectively) as it seems recent price action may have to consolidate further before further up moves can take place.
I am also looking at a EUR/CAD trade (currently 1.4390) for a move back to test highs near 1.4600. The euro will need to bounce versus the dollar for this trade to be effective as the Canadian dollar looks rather landlocked at the moment.
The US dollar has been sold on the release of weak economic data from the University of Michigan this afternoon. My view is still for a much weaker dollar in the 4th quarter.
Hopefully, this recent bounce will provide some good selling opportunities in the next couple of weeks before the markets resume to normal after this typical summer contra trending market.
There’s plenty to look forward to in the months ahead.
Wishing you a great weekend.
Yours,
Tom Tragett
Profit Watch
