Last Monday night (March 20) I blogged that USDJPY, trading at 112.60 at the time, would reach 110.00 by Friday March 24). Late on Friday afternoon the USDJPY was sitting just above 110.60, its low for the week and within 60 pips of my 110.00 Friday target; and the “Trump news” was still pending. When the news hit that the “Trump news” was negative I was already “counting my chickens”; assuming my 110.00 target was in the bag.
However, once again Trump news caused the complete opposite reaction of what would logically be expected. Clearly, a Trump defeat would be stock market negative (“risk off”), including the NIKKEI, and therefore USDJPY negative (traders buy the JPY when there is risk off – when stocks are going down).
What actually happened was stocks rallied (“risk on) and the JPY weakened, which it normally does when there is “risk on”. Consequently, USDJPY went from 110.60 to close on Friday at 111.30. Though my trade idea blogged on Monday netted 130 pips, I had every reason to believe the 260 pips was in the bag.
So what happened? Why did a “risk on” environment immediately happen (stocks rallied right away after the announcement) in the face of clearly “risk off” news? My near 40 years of Forex trading experience has no answer to that. That’s unfortunate because I am in the process (Saturday morning March 25th) of writing my FOREX WEEKLY trade idea PDF and I’m CLUELESS about what will happen this coming Monday and into next week.
In desperation I read a few of the free internet based outlook for the week blogs out there ( I try whenever possible to focus on my own interpretation and idea generation). One I respect breaks it down currency by currency:
- USD is vulnerable due to the bad Trump news
- GBP is good because Brexit is old news and the UK economy is doing well right now
- EUR is good (seeds of an economic recovery are apparent)
- AUD is no good (technically weak on nothing to turn it around at the moment)
- NZD is no good (Central bank talking it down)
- JPY is no good (Japanese year end and a lot of Fed speak this week)
This is good I think. The challenge is formulating a succinct trade view and a single trade idea for my readers. There are several key variables to consider because how they play out will likely unlock the best trade idea. The key variables this week are:
A. What will stocks do? I think if the Nikkei goes up then USDJPY will go up. If the Nikkei goes down then USDJPY will go down. So, if I had a clear opinion of the Nikkei (which in essence means stocks in general – risk on or risk off), I would have my trade view and my trade idea. To help out the new traders I will explain further: If I thought Nikkei higher I would have a bullish USDJPY view and my trade idea would be to buy USDJPY. If I thought Nikkei lower I would have a bearish USDJPY view and my trade idea would be to sell USDJPY. The problem is I am not convinced stocks will go lower after the strange (and opposite) reaction to the Trump defeat late on Friday. Clearly, if stocks went down after the Bad Trump news I would have a “risk off” trade view for this coming week and I would be a seller of USDJPY asap into the new week (so Sunday night). The fact that the stocks rallied leaves me CLUELESS on what will happen next, especially on Sunday and into Monday… For me the clearest and most obvious trade for next week is to expect the USDJPY to follow the Nikkei. But even that is not without some worries – the Japanese year end can mean the USDJPY / stock correlation goes off track temporarily.
B. What will Fed speak do? The USD made a very nice move higher a few weeks back when the US FOMC members came out in force touting a US interest rate hike (10 of them in one week to be exact). There was no rhyme or reason why all of a sudden the Fed decided to “push” a March interest rate hike; bottom line though it became a near certainty and the USD motored higher. But then after the rate hike was announced the USD cratered; no clue why that happened. So what does the onslaught of Fed speakers have in mind for the market and us traders this week? Well, they said nothing for months/ years and then all of a sudden a few weeks ago sent out a coordinated message. I don’t think they will have much to say this week. I am expecting their usual say very little with some hawkish (talking that interest rates are headed higher sooner than the market thinks) and some dovish (talking that the market is ahead of itself on interest rates. So bottom line I see the Fed speak as a non event this week from a swing trade perspective, which is what my FOREX WEEKLY is about.
C. What about Brexit? It’s old news that article 50 will be triggered this week. The GBP has been doing well both technically and fundamentally and there is no reason to expect a change. Ah, so perhaps bullish GBP is a trade view and buying GBPUSD is a possible trade idea? To be a complete analysis requires asking about the other currency in the GBPUSD pair – the USD.
D. What about the USD and the “Trump Trade”? The Trump Trade is this: The USD theoretically should benefit from higher interest rates due to higher inflation caused by Trump spending money on Government projects and Government incentives to get the US economy going again. Stocks like it because business will benefit from the increased activity and demand for their products. So the Trump trade has lead to a higher USD (and especially a higher USDJPY) and a higher US stock market on expectations of higher interest rates and more Government spending and Government business incentives.
The Trump trade is stumbling (Trump has failed on getting the immigration and health care promises achieved). Trump did get the Keystone pipeline approved so at least the spending Government money part and creating jobs (at least temporarily) is working somewhat.
What I’m thinking is a lot of Trump’s “magic” is his promotion and its unlikely the USD will benefit from any more promotion (will need real action and that is weeks / months away – tax reform). Before tax reform the Mexican wall will be the next test for the Trump trade. I think the market will be skeptical instead of optimistic this time around.
E. What about the technicals? The charts mean something different to everyone because we all look at different time frames for analysis and drawing conclusions. I try to look at the shortest period of the time I can and not put any indicators on the chart – just the exchange rate. My apologies to the MACD, Stochastic, Bollinger, RSI, Elliot wave aficionados. Looking at the charts for the last couple of weeks and last week in particular I like USDJPY short and GBPUSD long; I also like EURUSD long (third choice)
F What about the fundamentals? Next week we have Article 50 but it seems the market is use to the ongoing Brexit stuff so I don’t think much will happen immediately following the announcement. Their really is no other Tier 1 scheduled news this week. The trade that has been working for me will be my day trading bread and butter again next week; and that is the positive correlation between USDJPY and the Nikkei. For the newbies a reminder this was explained earlier in this article.
AND WHAT ABOUT A SWING TRADE FOR THIS COMING WEEK? I don’t have one. I’m too suspicious of the stock and USDJPY rally late Friday to assume the obvious – lower stocks and lower USDJPY. My trade idea is sell USDJPY when the pip risk is low so it’s not a big commitment; if you get in a trade and its working (your tight stop is not triggered) try to stay with it because it is the logical way given everything going on right now. If this is too complicated or inconvenient for you I apologize.