When the worlds central banks start talking about inflation targets and the potential for tightening the markets listen, but where is the substance and the follow through? The BOC stepped back from their optimism to caution on the dangers of tightening and the downside risks of inflation. Why? Well, a more expensive currency threatens the growth and the Central Banks have to control the reaction. They have a level and they try to maintain it…a balancing act.The CAD fell sharply.
This has coincided with a week that has seen strength return to the USD but a rally that has been politically driven so not the surest of foundations. Add to that the uncertainty over the Fed chair, two candidates seem to have been left behind, leaving it much more likely that a dove will be in charge, That would suit the Mr Trump and it may even be Yellen again. A dovish chairperson will not lend strength to the USD
If you take a look at the USDX it has refused to break the inverted head and shoulder pattern
Politics is the cause of uncertainty and choppiness and dominated market moves from the start of the year, but it is not the only factor. The Central bank balancing acts and the lack of follow-through is also causing confusion. The ECB are up later today and there is a speculation here as well that Mr Draghi will not want to be too optimistic with yields up a little and growing problems in the southern parts of Europe. Ours is not to guess, but we now wait and watch to see which way the wind is blowing. We could well see another cautionary tale.
In other news the UK saw an improvement, somewhat unexpected in GDP, edging up to 0.4% and supporting a sharp move in the GBP. There is a growing expectation in the UK that the BOE really will follow through on higher rates as they attempt to control inflation caused by a weaker currency following Brexit.
As for China, the leadership has firmed and assumed much more power…a subject for Monday.
The Watchlist
The USD may fail to push further, although we will track the yield for clues and see what the tax reforms produce. There seems to be disputes around this topic already and a budget vote also later today.
In the event of the faltering of the USD rally:
Gold
At good levels to consider longs but be aware of the US news and ECB as well as any weakness there could lend the USD some short-term strength.
The GBP is high on the list for pullbacks
GBPUSD
Pullbacks to long,
EURGBP: looking for shorts:
GBPNZD
Needs a big pullback but a solid pairing for strong v weak. A new one to the list but on the radar perhaps for next week:
Brexit, of course, can throw a curve ball and we are always alert to the news there.
The AUD has also struggled this week with CPI data and has broken support…pullback shorts are therefore on the radar:
AUDUSD
The NZDUSD
We were watching for an entry and have not yet got the pullback:
AUDNZD, still a long bias and again needs to pullback:
USDJPY
Looking for a weaker USD, this is in a good place. Needs news flow and is subject to the yield and to politics so a little tricky!
USDCAD
This was on the list to long and now is another wait for a pullback , do not chase. I will watch the resistance and see what the USD is doing.
As always these are my own trading ideas and not recommendations…I will be back on Monday after the ECB news for a weekly round up and another look at what pairings offer the best probabilities. Waiting for pullbacks can be tiresome, but the good news is that big news, which has to be respected, often provides catalysts in times of waiting. The point is we have to decide where we are doing business and wait for the market to come to us.
Patience pays and so does controlling our frustration if things move too quickly to take advantage, they are all going to give more entries eventually!
Judith Waker
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