Daily Alert: For Tuesday 5th January 2016

Mark Nugent2016 H1, Daily Alert, January 2016

Today’s slides are HERE.

Today’s Economic News

The major issue from the calander was Chinese Manufacturing PMI printing at 48.2, missing forecast of 48.9. However the truly significant event was the Chinese stock market sell-off and the subsequent triggering of their “circuit breaker” on its first day of operation. The circuit breaker is designed to pause trading on the CSI300 index for 15 minutes if there is a fall of 5% in any one day and to close the market for the day if the daily fall reaches 7%. This happened today. It was driven by speculation that the existing ban on large shareholders selling shares was about to be lifted. This caused smaller shareholders to sell to avoid a falling market.

The impact across the globe has been dramatic. All stock markets are down and the JPY has strengthened significantly as the market moves to risk off. This was not a day to be trading forex.

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Opportunities

1. Now that the Fed has begun interest rate tightening, this will put significant pressure on emerging markets as they hold huge USD-denominated debt that will get more expensive to service. So we should look at strong + weak pairs, where the strong pair is USD and the weak pair is one of the major emerging market currencies of Turkey (USDTRY), South Africa (USDZAR) and Brazil (USDBRL). The idea would be to go long on pullbacks to better pricing. Beware of spreads. The spread on both USDTRY and USDZAR is 4 to 5 times the GBPUSD spread, for example. I have yet to find a broker for USDBRL.

USDTRY

The USD vs the Turkish New Lira is at the top of the triangle. I would look at buying from the bottom trendline.

 

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USDZAR

The USD vs the South African Rand is trending strongly and is at an all-time high (which is a risk when considering going long). Closure near the 21EMA would tempt me to go long.

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2. Swedish Central Bank Intervention?

It is believed that the Swedish Central Bank will intervene to  weaken the strong Krona. (Story HERE.) This gives us an opportunity to profit from selling the Krona:

USDSEK

W1 chart. Currently in the middle of the range. Consider going long from the bottom trendline on the D1 chart.

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EURSEK

W1 chart. In a better position for going long but the Euro is not as good a counter pair as the USD. Consider trading both, but use half the total risk on each pair that you are prepared to place on this strategy.

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3. There is always the opportunity to sell JPY when risk moves back on. I would look at going long on USDJPY maybe around the top of today’s candle. Make sure the stock markets seem to be rebounding to confirm we are risk on.

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I do NOT recommend rushing into any of these trading opportunities this week. Staying in cash is a perfectly valid decision. I personally will need to see stock markets rally to tell me we are “risk on” again.

Major Issues for tomorrow

Global Dairy Trade (NZD).