Weekly Review

Very often, currency movement is dictated by the overall 'market risk environment'. But during the week starting Monday 19 October, we had to look a little closer to home to pin-point the movement of some of the currencies.

The week began with news of civil unrest in France, people far cleverer than I could give you an in-depth explanation, but my take in a nutshell...Frustrated by the unaffordable cost of living, high energy prices, underfunded schools and public systems. An overall lack of trust in the government in general, led the people of France to the streets in protest.

The bottom line is that the outcome was a rapid rise in French bond yields (Remembering: bond yields rising rapidly for the wrong reason = negativity). And negative EUR sentiment was arguably the biggest story of the week.

Two other countries with events at home moving the currency were Australia and the UK. Both countries reporting positive data (Remembering: Positive data= yields rising for the right reason= Positivity).

And I would suggest 'EUR AUD short' or 'EUR GBP short', in what I would term 'a relative fundamental trade', would have been logical trades throughout the week. And could remain an option as the new week begins.

In terms of the 'overall market risk environment', it could be described as a week of two halves. With early week optimism for a resolution in both the Middle East and the Ukraine, the price of oil dropped, boosting overall sentiment.

But optimism stalled on what appears to be (another) failed peace attempt. And stalled optimism quickly turned into 'escalation fears', sending the mood into 'risk off', at one point on Friday the VIX rose above 20 for the first time in a while.

Now, this is where it gets a bit complicated. Because, alongside 'war negativity', we also had 'AI infrastructure negativity'. Both ultimately create growth fears, where it gets complicated is how the USD reacts.

War fears: Rising oil + Rising Bond Yields.

Inflation is likely to rise too much = strong USD

AI infrastructure fears: Falling yields, which is a classic risk off correlation.

But in this scenario, the USD came under pressure as interest rate expectations are quelled. And the JPY and CHF seemed to benefit the most

The playbook I will take into the new week if the negative sentiment continues:

War concerns: long USD (arguably long CAD due to rising oil)

AI concerns: long JPY or CHF

Speaking of the new week, it's jam packed with potential market moving events, namely a slue of central bank decisions (NZD, CAD, USD, EUR, JPY). Alongside earnings season, so far specific companies have moved on earnings reports, but it hasn't fed into the overall environment yet. But that could change this week. Not forgetting a about data releases. All in all, it's a complicated picture with a lot of moving parts to pay attention to (central banks, oil, geopolitics, France, AI, earnings, economic data).

The amount of information to take in can be overwhelming at times. And I think it's important to accept, if you're not sure or can't quite explain any moves, it's ok to sit on the sidelines and wait for something 'clear and obvious'.

As things stand, I think my highest conviction trade would be a EUR sort, specifically following a period of EUR strength (without a cause), which stalls and looks like it's going to reverse. Vs whichever currency has the most going for it at the time.

Im also prepared to place a 'risk environment trade', as I write this, it seems more likely to be a 'risk off' trade. But that could change as the week progresses.

Finally, there is the potential of 'interest rate expectation trades', depending on the narrative and reaction to the central bank meetings.

As I say, there is a lot going on and I reiterate that's it's very valid to wait until you feel confident in something 'clear and obvious'.

On a personal note, I placed three trades this week.

Not long after Sunday's market open, given the news from France, I placed EUR USD short. The trade stopped out, arguably, It was a bit 'gung ho' placing a trade so soon into the week. But I do still think it was a valid trade.

During Tuesday's 'peace optimism' I placed AUD CHF long, which hit profit.

By Friday's early European session, that optimism was out of the window and sentiment for the EUR was still subdued, I felt very confident EUR JPY was going to continue lower. The trade hit profit.

During Friday's North American session, we did get a bit of 'risk positive moment'. As the new week begins, we'll find out whether that positive moment can be sustained or was merely a bit of respite.

Results:

Trade 1: EUR USD -1

Trade 2: AUD CHF +1.5

Trade 3: EUR JPY +1.1

Total = +1.6%

Total since start of blog = +76.8% (risking 1% per trade).