FX Commentary from Dave Floyd, Aspen Tading Group

FX Commentary from Dave Floyd, Aspen Tading Group

A Traders Market

The stellar rise in the Dollar in the last two weeks has come to end on the heels of Friday's sell-off which has now resumed in Australian/Asian trading. Was the rapid rise a bit overdone? Perhaps. Now that the dust has settled, we need to examine several factors. Regardless of the conclusion (discussed below), the result is one where FX traders will need to be nimble and flexible. For the time being, we do not see any longer-term trades setting up (duration of several weeks), rather, we are more comfortable placing shorter-term trades based solely on technical levels. The market appears to still be seeking some definitive conclusions on the macro level which makes directional trades right now pretty challenging.

The rapid rise in interest rates in the US compliments of the bond market, and the concern over a slowing Chinese economy are the two main catalysts for recent price action in FX. While the industrial sector in the US appears to be gaining traction, the consumer is retrenching. Re-fi's are off nearly 50%. This will continue to put pressure in retail sales going forward and may likely lead to slower growth towards the end of this year.

For now, the market appears focused on higher rates in the US, hence the strengthening Dollar. However, this rapid rise in rates has taken back nearly 40% of all the "easing" compliments of the Fed since 2003. Has the market overshot?

So, with rates rising, some signs that commodity prices may be on the verge of weakening, and China the big wild card; traders appear to be in risk aversion mode. The result has been sideways trading. Nonetheless, despite the sell-off the GBP and EUR in recent weeks, there are some compelling reasons, both technically and from a macro perspective to start seeking short-term long positions against the Dollar.

EUR/USD: a further reduction in interest rates by the ECB is not in the cards any longer. Technically, the EUR has built a nice base in recent weeks and is not flirting with a break back above the 200-day ema (1.1960). Daily, weekly and hourly stochastics are firming too. A break of 1.1760 would negate our short-term bullish viewpoint.

GBP/USD: higher rates relative to the US and a robust consumer sector coupled with a slowly improving industrial sector makes for a solid macro back-drop. In recent weeks however, this has meant little. With the technical break at 1.80, head & shoulders neckline, the longer-term chart is certainly not solid. But, as mentioned at the beginning of this week's column, we are only concerned with short-terms moves at present. Like the EUR, the GBP is offering some compelling reasons for longs in here. Solid support is at 1.75. Daily and weekly stochastics have not turned up yet, but bear watching. With 75 more basis points of tightening in the cards by year end, the widening rate differentials between Great Britain and the US should attract buyers.

AUD/USD: the domestic economy is feeling the effects of fiscal tightening earlier this year. Housing has cooled down as the consumer. A China slowdown will surely exacerbate current weakness. For now this is one currency where short-term positions are required when trading against the Dollar. Longer-term trades may be suitable if you were to consider a long in EUR/AUD.

The bottom line, one cannot argue with the charts, the trend is clearly up in the Dollar, and there is no need to fight that as it relates to taking positions. However, there are some subtle signs that the up-trend since mid-February may be vulnerable to a break. This likely explains the sideways action in recent sessions. Stay flexible and realize that the better risk/reward trades at present may be the ones that go against the Dollar.

There will be updates throughout the week as needed so check back periodically. For now, we are long the GBP/USD at 1.7613 as of Sunday afternoon (Pacific Standard Time).