Hello, my friends! The week is starting and we should expect a bumpy ride but with a lot of good opportunities. Why do I say bumpy ride? Well because all the big changes in positions are also related to some kind of big political event, so I will play very safe this week, I will wait to the extreme in prices, patiently waiting for supply/demand alerts to pop to take a position. Let’s go to business.
USD DOLLAR – BULLISH BIAS
“Wait, How!? I saw your post on twitter with a lot of constituents of DXY turning bullish!”. This is really tricky, but sometimes things are written between the lines. I will describe step by step so this becomes clears for you too!
First, this week we have the FED Interest rate decision and it’s widely expected that we will see no cut and also: (Source: Nordea)
- Fed could signal patience after delivering 75bps – as much as it delivered during the two previous episodes of “precautionary easing”,
- ISM might rise – dampening US growth worries temporarily,
- labor market data could also show a pick-up in wage growth (seen as limiting the Fed’s easing potential).
We have a positive expectancy for USD and this is one good signal! And just to reinforce my point of view, we have bank’s reports with a positive outlook on USD while retail finance websites with negative views.
USD and USDCNH PATTERN
COT Data most of the time gives me the direction and point me in which direction I should look and this time was no different. Yes, we saw a big cut on USD longs, but the scenario does not point for a bearish case so this makes me look more than the obvious. While GOLD is the main gauge for risk sentiment we must take in consideration USDCNH at this time, because one of the main drivers of the deterioration in risk is/was trade war, and we also know that China is depreciating its own currency to offset losses from the tariffs, so looking how its price its behaving can give us clues on what is about to happen.
So the first thing I did was to search for a correlation/pattern with USDX and USDCNH, so I plotted a simple chart of one overlaying the other.
So at first look, It seems they guard a positive relation, and this is expected two big trade partners and also first and second-largest economies. But let’s narrow the search to when Trump took the office( we are interested in this new trade paradigma), and see if this relation is somehow stationary, or in other words if it’s constant! So I did a little trick with the prices and plotted the following formula:
(0.8*DXY) – (12 * USDCNH) +4
And what I got is pretty interesting showing that since Trump took office this relation is indeed stationary and it has just started a new cycle.
This still may not be clear for you, so I detrended the series and got this chart. The Yellow line is price detrended!
So for this to make sense and not only some kind of “eureka” moment we need to look to the fuel, the money, cot data. Let’s look what investors were doing last time we the pattern happening.
The first interesting thing to note is when the last cycle started, it was last year at exactly the same period we are right now, so we have a seasonality component, which is pretty good. Ok, and the COT DATA!?
This is from Last year:
And this is the data we have right now!
So whats happened to USDCNH after this:
DXY:
We have Nordea bank tracking how Trump Job Approval is positively correlated with Dollar Index(DXY):
So we have some factors pointing us to believe that a resume of the uptrend on USD is expected for weeks to come. So we will continue to play the last week idea and add some this week:
Trading Long side on demands, supply breakouts and pullbacks on:
- USDJPY
- USDCHF
Short Side:
- EURUSD
- EURJPY
EURUSD has the biggest weight on the Dollar index and saw big cut on short positions on the last 3 weeks what gives investors bullets to add to the short side again. EURUSD is complete correlated to this -> fred.stlouisfed.org/series/ICERATES1100EUR10Y
To paraphrase Nordea again:
the ECB’s QE program is about to start, as will the new tiering system. We suspect the former to bring about a more negative flow environment for the EUR than what we have seen recently.
Another interesting thing is U.S. dollar swap rates are in uncharted territory after the two-year spread recently turned negative and a normalization of the spread on 10-year swaps should be taken as a signal for a resumption of the long-standing bull stock market trend. This will finally turn into positive dollar flow, increase demand and pushing dollar high!
And to illustrate this, check the signal I got this week for S&P500 Index:
That’s it my friends! I hope you all a great week of trading and also that you can make nice profits! If you need further help or assistance just leave a comment here or reach me on twitter.
And don’t forget to use the “google of finance” when searching for news -> news.leohermoso.com/ It’s a nice and free service!
Best Regards
Leo Hermoso
