(As written for My Paper on 23 August 2011. Click here to enlarge)
Close to 8 trillion US dollars has been wiped off global equity markets since the S&P downgraded the US debt less than a month ago. Suffice to say, every trader would take this as a cue that the US dollar is weakening.
In the currency maket, the scenarios are played out slightly differently. Since we are always looking at currency pairs, we need to understand how one currency moves against another.
Interestingly enough, in the 2 weeks right after the S&P downgrade, the US dollar weakened against currencies like the Japanese Yen (JPY) and the Swiss Franc (CHF), but actually strengthened against the Aussie (AUD), Kiwi (NZD) and the Loonie (CAD).
Why is that?
The answer, lies in the status of the US dollar as a safe haven. In times of fear and panic, money leaves risky assets like stocks and commodities, and finds in way into safe assets like bonds.
The US bond market, or Treasuries, is by far the largest and most liquid in the world, accounting for almost half of the world bond market.
The commodity-linked currencies like the AUD, NZD and the CAD are considered riskier currencies, hence they tend to fall against the US dollar in times of fear, panic or low growth.
The only reason why it has fallen against the Yen and the Franc is because the latter currencies are viewed as “safer” assets compared to the US dollar.
One of the biggest reasons for this is due to the fact that both countries, Japan and Switzerland, run current-account surpluses. This means that they don’t need to rely on foreign capital to balance their books. The US on the other hand, runs a current-account deficit.
This week, central bankers from around the world will meet at Jackson Hole, Wyoming for their annual conference. It’s the same place Ben Bernanke said the Fed was prepared to “do all that it can” to ensure a smooth economic recovery.
What subsequently followed, and what I termed as the “Second Wave”, was the Fed’s injection of USD600 billion into the markets in November 2010.
Will Bernanke announce intentions for QE3?
Here’s a clue for all traders and investors to chew on: last week, ten-year yields fell as low as 1.97%, the lowest ever on record, which tells us that the markets are pricing in about USD500 billion in Treasury purchases by the Federal Reserve.
USA GDP q/q. Friday, 26 August 2011, 8.30pm. I expect figures to come in at 1.1% (previous figure was 1.3%).
Sell USD/CHF at 0.7770
After the uptrend started on 10 August, USD/CHF has been moving in a range on the hourly chart. Support is detected at 0.7785 and Resistance is at 0.7995. With the upcoming meeting between the central banks this week, the bias for the US dollar is to the downside.
We will go short once prices close below the support level of 0.7785. Entry is taken 15 pips below the support level and a protective stop is placed 90 pips above the entry price.
We will have 2 targets on this trade.
Entry Price = 0.7770
Stop Loss = 0.7860
1st Profit = 0.7680
2nd Profit = 0.7590