Looking For Dollar Longs – Forex Trading Tips

We will be looking for dollar longs on pullbacks throughout the week, especially against weaker currencies such as the euro, yen and kiwi – leading into the rate decision.

Current Sentiment:

The US dollar made solid gains yesterday on the back of three positive readings. This is combined with the better than expected Core CPI readings from Friday. This bullish short-term sentiment matches the long term fundamental picture as markets prepare this year for the first interest rate hike from the US since June 2006. USDJPY reached its highest level since 2007. Most investment banks are calling for a continuation of this uptrend towards 125.

Antipodeans fell against the greenback yesterday along with commodities. Citigroup have lowered their iron ore price forecast which, if accurate, will weigh on the Aussie. Pressure is also mounting due to the upcoming rate decision from the RBNZ where the OIS market now prices a 51% chance of a cut. The New Zealand Institute of Economic Research forecasts the RBNZ keeping rates on hold until 2017 while three banks (ANZ, First NZ and Deutsche) all predict a cut in both June and July.

There has been little in the way of data releases in the Asian session aside from BOJ MP Meeting Minutes which contained no surprises; members saw QQE as having desired effects.

Fundamentals:

The USD remains the strongest currency in the longer term, and the short-term sentiment now matches this bullishness. Friday’s CPI along with positive data on Tuesday has reaffirmed USD strength amid speculation of a rate hike by September.

The EUR remains fundamentally weak due to QE and the ongoing Greek debt issue. If Greece fails to make any of their imminent repayments, the euro will be pressured further.

GBP is looking at a rate hike in the next 12 months and also has bullish short term sentiment which matches this fundamental backdrop. A recent run of positive data and upbeat meeting minutes have buoyed the pound against weaker currencies. This strength is expected to remain.

AUD is relatively neutral now there is no speculation of rate cuts in the near term. As such it will take most of its direction from the price of iron ore and economic activity in China. Movements in AUDUSD will largely be a function of USD sentiment. AUD enjoys a positive interest differential against all majors except NZD; fundamentally this is bullish for the currency. Recent strength in USD combined with low commodities prices forecasts will likely weigh on AUD in the weeks ahead.

NZD has a chance of decreasing interest rates in coming months. The Overnight Index Swap market is pricing a 51% chance of a June 11 cut. Several major banks predict a cut in both June and July, while NZIER expects the RBNZ to remain on hold for at least the rest of the year, as they believe the central bank cannot afford to boost the overheating housing market.

CAD remains on the weaker side of neutral until we see more data or direction from the BOC. CAD will take most of its direction from any significant changes in the price of West Texas Intermediate crude oil. When there is no oil-related news, the oil price will generally move with negative correlation to the USD. Last Friday’s CPI and Retail Sales came in worse than expected which is negative for CAD.

JPY remains bearish due to QQE. Yen weakness has accelerated recently on the back of USD strength. This move is expected to continue. Sentiment on the JPY can turn bullish quickly if there is major uncertainty in the markets.

CHF is fundamentally a weaker currency given the SNB’s negative interest rates, however it is highly susceptible to volatility due to SNB potentially intervening to weaken the currency as it tends to strengthen on safe-haven demand. CHF often will take direction from the EUR with which its correlation over the last 50 trading days is 74%.

Technicals:

We will be monitoring levels of support and resistance in unison with any impactful news in order to find a high probability trade. Support and resistance includes previous highs and lows (horizontal s/r), trendlines, moving averages, Fibonacci retracements, daily pivot levels and round numbers. These levels of support and resistance are most effective when there are several of them converging at the same area (confluence).

Other Market Moving News:

Today is a light calendar with G7 Meetings and BOC rate decision and statement.

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