I have gone into this week with a mix of pairs that are highly liquid and maintain a considerable correlation to underlying risk trends. Taking stock of the larger fundamental trends I am considering, first there is the general direction that sentiment is heading. While many benchmarks of risk appetite may have stalled (the Dow and Gold), the general imbalance between fundamentals and current price is too meaningful to ignore. I believe we are currently seeing a correction in a larger trend; and that trend is unwinding carry-based positions that carry more risk than many were perhaps anticipating and yielding far too little to make them attractive when the tone of the market is caution. Another big fundamental consideration is the health of the Euro Zone. Greece seems now an afterthought; but be assured, the troubles this single member highlights for the larger group are deeply rooted. Finally, there is the US dollar’s position as a funding currency / safe haven. The greenback won’t shake its appeal for liquidity; but the funding role is overblown. The nation’s benchmark rate is generally in line with most of its counterparts; but the sheer density of US assets and an outlook for monetary policy that is more hawkish than many of its peers suggest this currency will flip to carry currency. We are already starting to see that playing out; and and the combination of carry evolution and demand for safe haven makes the dollar a fundamentally solid currency.
As for positions, I have taken some exposure to my underlying outlook for risk trends with sticking to the EURUSD and GBPUSD shorts I established last week. Stops of 1.38 and 1.5620 respectively will give me a decent buffer. My outlook for the Euro Zone’s trouble’s are represented with the same EURUSD position as well as the EURGBP short I have maintained. For the latter pair, I am waiting to see whether the 200-day SMA (0.8820) or 0.8660 gives first. My dollar-bullish outlook is well-account for; but a USDJPY long I established today is more directly attached to this bearing. I established a long position at 91.10 and set a stop of 91.75 with an initial target of 92. A break of the 200-day SMA is my ultimate objective; but I have kept my risk low because a sudden surge in risk aversion could run my relatively modest support.
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