Forex during the week of July 8th – A Normal Week Sort Of.
The Forex markets continued with in the same vein over the last several weeks in these past five sessions. Namely, the US Dollar continues to show massive amounts of strength, and is breaking out against again, the Canadian dollar, the British pound, the Australian dollar, and many other currencies globally. This would’ve been pushed into overdrive on Friday, as the nonfarm payroll numbers out of America printed a positive 195,000 jobs for the month of June. As a result of this, interest rates spiked in America which always attracts new inflows of capital.
10 Year Note, daily, USA
For those of you that don’t typically trade treasury markets, you should know that falling prices means rising interest rates. In other words, you will pay more to hold onto the trade, meaning that most of the hot money is leaving the market, as they find their way into the equities market. However, those who are looking for your interest rate plays will buy these bonds as they fall in value, simply because of the higher interest rates over the duration.
Despite what Forex traders often think, it is not the currency markets that move global financial markets, it is the bond market. With that being said however, as interest rates rise, people want a “piece of action” that can be found in that particular market. By contrast, interest rates in Japan continue to fall, and this is exactly why you see the USD/JPY pair continue to rise. Money is simply going to where it is treated better.
As you can see, money flew into the US dollar on Friday, capping off a strong run into the currency to begin with. This was seen across all table currency pairs, but we now believe that the USD/JPY pair is primed to continue much higher. We have thought for some time now that would be the best trade out there for the next several months, if not years, but now we think that the next leg is about to start. Keeping that in mind, a break above the highs from the Friday session should bring fresh money into the marketplace, and do not forget that the Japanese have not had a chance to react to the excellent employment numbers out of America.
Oil markets continue to rise…
The oil markets continue to rise overall, mainly in response to the political trouble in Egypt. Violence is starting to find its way to the streets of Cairo, and as a result traders are concerned about the Suez Canal being closed. Quite frankly, it’s difficult to imagine a scenario where the Egyptian military allows that to happen. Simply put, the tourism market in Egypt is dead, and the Suez Canal is about the only thing working in that economy right now. If Egyptians want to eat, the Suez Canal will stay open. On top of that, the U.S. Navy has said in the past that keeping the Suez Canal open was a high priority for that part of the world. We believe that the U.S. Navy would open the canal if the Egyptians tried to close it.
That being said, the oil markets have risen too far too quick. There is a good chance that the oil markets are way ahead of themselves, and this could be seen in the USD/CAD pair. After all, while the oil markets continue to rise rapidly, the Canadian dollar continues to sell off. This is counterintuitive, and could present a trading opportunity for the astute trader out there.
Light Sweet Crude daily chart
One of these two charts is going to end up being completely wrong, and we believe the fact that the Suez Canal is still open leans towards the idea of the oil markets being out of whack. Quite frankly, even with an improving employment market in the United States, demand for oil is not going to justify $105 per barrel. Because of this, we believe that waiting for a sell signal in the oil markets on the daily chart could turn out to be one of the best trades of this quarter. On the other hand, if you do not trade the oil markets themselves, look for the USD/CAD pair to continue to rise on that signal as the correlation would return to normal.
This should be a “normal week.”
While the idea of a “normal week” in the Forex markets seems to be a bit of a joke these days, the upcoming five sessions should be somewhat normalized now that the Independence Day celebrations are over in America. Of particular interest this week is the CPI numbers coming out of China early Tuesday morning in Asia, as the world continues to worry about a Chinese slowdown. Expect this to have a drastic effect on the AUD/USD pair, with a weak number pushing the pair even lower.
Wednesday has the FMOC minutes coming out of America, and while no policy changes expected, people will be looking for little hints of tapering as far as quantitative easing is concerned. The market currently expects to see quantitative easing start to taper off in September. Any change in language or suggestion that I could be at a different time will more than likely rattle the markets.
The Bank of Japan has a press conference on Thursday, and while we know that the monetary stance out of that central bank will continue to be accommodated, the question then becomes whether or not there are any statements that justify further Yen selling. At this point time, we don't necessarily expect to hear anything, but the reality is that the central bankers like to give the markets a little “knowledge” every once in a while.