Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.1% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
Where the USD exploded 11.7% higher in the first five months of the year and some felt this was partly responsible for the 56% decline in the NAS100 seen over the coming months.
Well, we’ve seen a similar re-run with the USDX +10% while the moves in tech equity are now quite mature and the USD has been the default position to hedge equity drawdown risk – clearly, if the equity markets undergo a genuine change of fortune and we see the US500 push towards 4200, then USD longs will look to reduce as the need to hedge isn’t there. Of course, if traders start to apply equity shorts again and we see markets turn, with the VIX index back above 30% then the USD will likely find its form again – the equity market still seems key for FX direction.
(Source: Bloomberg - Past performance is not indicative of future performance.)
For now though, if I look at the yield differential between German and US real (inflation-adjusted) 10yr rates – a simple overlap suggests EURUSD should be trading closer to 1.1000. Generally, this has been a good indicator of near-term flows in EURUSD. The fact the ECB is about to embark on a hiking cycle in July also pricks my interest, as does positioning where we know the market is very long of USDs.
(Source: Bloomberg - Past performance is not indicative of future performance.)
If I overlap the moves seen in 2000 for the year vs what we are seeing now it seems this analogue suggests if history were indeed to rhyme then we could follow the 2000 playbook and start to see a period of USD drawdown, before another leg higher. It feels to me that the risks are now skewed for a weaker USD, at least in the short term.
I do see scope for USDJPY to trade to 128 perhaps 126, but I favour EUR – if equity markets do rally, then the AUD, CAD and NZD will outperform but the EUR has defensive qualities being a funding currency. So, it should work fairly well if we see equity drawdown, but participate on the upside, and we’re hearing commentary from ECB officials that a 50bp hike at a future meeting could be warranted. I like this into 1.0800 but could squeeze higher, before another leg lower. I will cut if we see a close below 1.0341, which naturally gives me a lot of risks and so position sizing should be minimal. Trade the possibility with Pepperstone.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.
Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.