A review of a big week with big moves, big data and big comments 26 January 2018

The View from LaSalle Street

The talk on Friday was all about President Trump’s appearance in Davos at The Forum, his comments vis-à-vis the USD, and his hints at infrastructure spending or similar macro developments. His “headline comments” are being met by the predictable criticisms, much of which I’ve seen on various blogs and in commentaries today. Being a huuuge supporter of growth through the spread of global commerce, I am utterly unconcerned with the minutiae of these kinds of comments on the variations in rates in FX, although I am completely game for a quick trade or two utilizing said verbal blather by the POTUS. More on that in a minute.

Looking at the economic data, one gets the idea that it’s a mixed bag out there. All Forex eyes are in two general areas for hints of a pickup in growth numbers. On one hand US interest rate strength is monitored closely through attention to releases such as our GDP revisions, as Fed watchers anticipate a continued tweaking higher of domestic rates, as has been widely hinted at by Fed management. That subsequent dollar strength would signal a sea-change out of the ZIRP malaise our markets have been in for eight years now. On the other hand, ECB watchers are looking carefully for ANY signs that hawkishness is creeping into its guidance off zero, which would kick-start a nice carry-trade battle as sovereign rate changes would once again take center stage in the Forex theater.

The long, hard road up from Zero, though, is a tough one, politically, but you always look to the Big Dog in the rate wars and right now, the “soft dollar paradox” rules the trading day: The USD keeps trending lower as we move to encourage domestic exporting via unilateral trade deals, contrasting it to building in a “rate premium” which would naturally drive the dollar higher as interest rates trend as suggested by Fed guidance.

The bones of the paradox are built because the US fiscal policy, as opposed to the Fed’s monetary policy, would suggest two opposing forces at work. Accordingly, the USD remain in a sell-rally mode as it winds its way to a comfortable spot lower against the other Majors. The “soft-dollar” at work.

Unfortunately, I might suggest, America’s politicians, those running fiscal policy, namely POTUS and our Treasury Secretary, do NOT speak for FX traders while we’re digging out from under the suppressed growth of the previous administration’s eight years of imposed zero-interest policy. Our markets, pre-Obama’s Fed, used to be eminently tradeable. Nowadays, however, it requires a bit of nimble trading-footwork and quick decision-making when trading intraday (rather than the more daunting possibility of taking a nice, trending, macro position – another time, another column).

Fading the news was the trade that worked well this week

I would’ve suggested buying EUR/USD through every resistance point after Thursday’s “Trump-bump” down to 1.2370, then selling each at a 25-30 pip profits up to the natural 1.2500 barrier with a nice tight (15 pip) stop each step along the way. That itself would have made for a good trading day. Note, neither Trump or Mnuchin is changing policy based on their “strong-USD” remarks. The trend this month has been a softer dollar as mentioned above by Fiscal policy. We are simply calling for fading (countering) the political blather, or verbal intervention, as we’ve been doing since Japan* perfected the technique in the 90’s – my seminal days in FX.

Speaking of *USD/JPY, the headline softer GDP announcement this morning would have yielded the same kind of trading strategy: selling every 25 pips lower with a 15-pip scaled stop would have netted roughly 70 pips after paying spreads and you would have been finished by lunchtime (Always take a dollar-based pair when you have a strictly US-based release on the wires). Fade the headline until the move has exhausted itself. Pro traders have been making bank on that technique since I first sat down in front of a screen.

That’s it for this week. Come back often, as we’ve got plenty of ground to cover on currency and crypto developments in the coming months.

Stay tuned ……

Bill Hoerter

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