Currency overview.

I can't start a currency overview without mentioning the 'risk environment'. Which is currently (and has been for a while) the dominating factor when it comes to currency movement.

I must confess, I thought once central banks started to cut rates, the relative strength and weakness would be determined by how quickly or slowly each bank would cut rates. And that may still be the case once the FED finally cuts. But recently, the market has become very sensitive to US data, particularly anything related to US employment and manufacturing, as the market tries to second guess the FED, concerned it is behind the curve and a recession is coming. Whilst I don't believe the FED is behind the curve, far clever people than me are convinced a recession is coming. And I have changed my tune a little, in the sense that recently, I have been prepared to trade the 'risk off' momentum. Even though, at some point in the near future, I expect to revert to 'risk on' soft landing trades.

Here are my current thoughts on each currency:

JPY: Another factor in my slight change of view has been the JPY strength, primarily due to the unwinding of the carry trade. I've recently read a couple of articles suggesting ultimately, the BOJ will be powerless to stop the yen weakening over the medium term. But whilst there is still the possibility of another one or two rate hikes from the BOJ. The unwinding could continue. And USD JPY could fall a little further yet. Therefore, I'm currently prepared to long or short the JPY depending on the mood and momentum of the day.

USD: I'm finding the USD the trickiest currency to trade at the moment. Should it be weak because the FED is about to embark on an easing cycle? Or when the market decides data is too soft, should it weaken thanks to recession fears? But, when there are recession fears, the USD could strengthen due to it's 'safe haven' status. And on any given day, any of those scenarios could play out depending on how the market feels. But in 'risk on' and when the USD is weaker than both the JPY and CHF, that's when I believe the USD is a good short opportunity.

CHF: with the SNB overtly content with a weak currency, the CHF is a very good short in a 'risk on' environment. But when the market is apprehensive, the CHF strengthens. Although, in 'risk off' my preferred choice would be a JPY long rather than CHF.

AUD: very recently, data from Australia has started to soften slightly, but that hasn't stopped the RBA remaining 'hawkish' and there doesn't appear to be a rate cut on the immediate horizon. Which makes the AUD my preferred long in a risk on environment. Conversely, AUD JPY short is very tradable in a 'risk off' environment, regardless of how strong the Australian economy is or how hawkish the RBA is.

NZD: Almost copy and paste of the AUD, except to NZD economy isn't as strong as Australia's and the RBNZ isn't as hawkish as the RBA. But if the NZD has momentum over the AUD on any given day, I would be prepared to trade the NZD instead.

GBP: I've been surprised how well the UK economy has held up post pandemic. With a steady stream of solid data, the BOE isn't in a rush to cut rates multiple times. And similar to AUD and NZD, I'm prepared to trade the GBP in either 'risk direction' according to it's momentum against the others on a particular day.

EUR: Another currency I've found difficult to trade recently. All things considered, the EUR is fundamentally shortable, data is slowing and the ECB does seem prepared for multiple rate cuts. The EUR also is a potential short In a 'risk on' environment. But, when the USD is particularly weak, due to EUR USD being extremely liquid, the EUR can appear to be the strongest currency. And in that situation there is a case to say why not just jump in the momentum and long the EUR?

CAD: The BOC is probably the most 'dovish' central bank and has the most deteriorating economy. Really, if it was down to pure fundamentals, AUD CAD long would be the best trade to place. But the CAD can follow the USD due to geographic proximity, which makes a CAD short difficult when the USD is strong. Plus the CAD is often moved by the price of oil, so if oil is going up, it's again, difficult to short the CAD. But I am prepared to place CAD short trades in a 'risk on' environment.

So, that's my current approach to trading the currencies. As for today, it seems Harris edged the US presidential debate, which keeps the strange 'Trump trade' movements at bay for now. And the JPY has strengthened following BOJ comments. Which backs up the possibility of JPY longs. But in the interest of prudence, my current decision is to wait for US CPI before forming a conviction.

Feel free to email any questions: johnelfedforexblog@gmail.com