Free Profitable Forex Newsletter
Hey! This is Philip with this week’s edition of the Free Profitable Forex Newsletter!
Much as we anticipated in this Monday’s Fx Weekly analysis, the market has largely stayed range-bound, flavored by that CPI inflation report yesterday triggering some rollercoaster moves on USD pairs. In the end, the price gyrations had little to no impact on trend direction.
In light of the volatile and sideways market conditions, we are staying out of the market, except for our existing long USDCAD trade (see the trade update below). So, instead of the usual trade idea, this week we will review the recent market developments from a zoomed-out perspective (the longer-term broader dynamics rather than the zoomed-in day-to-day happenings).
Should we expect more volatility in Forex?
It is a tricky time for Fx markets, with many traders unsure what to make of the current developments. This week’s market action perhaps best highlights this fact. We saw high volatility in both directions, only to have the moves completely reversed. This is a hallmark of a confused market and potentially means more of this two-sided volatility is to come in the coming weeks.
Overall, it seems like USD bulls are definitely not ready to give up, but the pressures have increased as other central banks are also amping up their hawkish tone (most notably the recent ECB shift). Moreover, as inflation continues to rise across the world, the race to tightening and rate hikes for central banks is gathering speed. These dynamics potentially mean that we can expect more volatility across the
markets, Fx included.
As central banks hit the brakes by ending QE and starting to hike rates, there is an increased probability that something breaks (think stock markets crashing, bond yields soaring, etc.). If the main support for stocks since the March 2020 lows were massive amounts of central bank QE, then what will happen when this stimulus is no longer there?
Thus, the main questions on investors’ minds now are, 1) will central banks be successful in bringing inflation under control?; 2) And will everything go according to plan, or will something break while they are trying to do that?
Under such a risk-off scenario (stocks falling), the implications for the US dollar would be bullish. While we are still far from this dismal scenario, it is certainly the big worry for investors at the moment. Hence, the range-bound action in markets as few are willing to enter new positions ahead of the many uncertainties in front of us.
Fx traders in this situation should keep an eye on risk sentiment and stock markets. Most of the major indices like the S&P 500 and NASDAQ are testing key support zones. A break below could trigger a new wave of selling, which will most likely feed into higher volatility in Forex pairs.
As the above NASDAQ 100 chart shows, a break of the 14,000 area could trigger a new sell-off. The next support is down around 12,000 and then at 10,000. That would be a big correction if it materializes!
Why we are keeping our long USDCAD trade
We stay long USDCAD with a stop just below 1.26 and a flexible target to 1.30 (flexible here means staying vigilant to exit if the above conditions don’t materialize). A break above the previous highs around 1.28 would signal that more USDCAD gains are ahead. Then 1.29 would be the first zone higher to book some profits.
This long USDCAD position is connected to the above discussion for the potential risk-off scenario, in which the USD would be the big winner, while commodity currencies like the CAD (and AUD&NZD) would be the losers. Given the at least marginal increased likelihood of this happening, it’s worth having a position in this direction (especially when it’s already in profit).
Here are other reasons why USDCAD could keep moving higher over the next weeks:
- Higher CPI yesterday and stellar NFP last Friday keep Fed hike odds fully intact. Now, the Fed could even lead the Bank of Canada in hiking rates (this would be a big surprise as the BOC was the most hawkish).
- COT positioning data shows that CAD traders are skewed to the long side. There is potential for a squeeze if those have to unwind.
- The final piece of the puzzle USDCAD probably needs to power higher is oil prices to come down. Right now oil is trading in a relentless uptrend. But how long can it continue and what levels to watch? Below we show the WTI crude oil chart and which levels need to break to see a reversal down.
The Volatility Edition: How to Battle Inflation
The market is a rollercoaster right now. People are desperately searching for more security in their trades and investments - to feel some sense of reassurance that future wealth is still within their grasp.
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Trade signals from the past weeks
- February 3, 2022 - Short EURJPY from 129.80, stop loss triggered at 130.10 = -30 pips; trade idea sent on Feb 2
January 26, 2022 – Long USDCAD from 1.26, stop moved to around breakeven at just below 1.26 (open & in progress; trade idea sent on Jan 21)
TOTAL: -30 pips in the past week
TOTAL: +5155 pips profit since October 1, 2018
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High Risk Warning: Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.
Any opinions, news, research, predictions, analyses, prices or other information contained in this newsletter is provided as general market commentary and does not constitute investment advice. FX Trading Revolution will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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