Trade of the Day for May 1st, 2013 – Long USD/MXN

Beware Mexico and the Falling Wedge

Investors have been in love with Mexico in 2013.  The nation has managed to shift the focus from its drug-riddled violence to its new government and an aggressive reform agenda.  There are a number of factors acting as a tail wind for the MXN appreciation.

1. Growth.  Mexico in 4Q2012 great at 3.2% y/y compared to the US 0.4% – the better growth made many argue that Mexico is a turbo-charged beta to the US economy.
2. Inflation. The central bank in Mexico continues to see its credibility rise as core inflation has been tame – the bank cut rates in March as MXN gains allowed them room on import price risks.
3. Liquidity.  Mexico has managed to gain favor against the rest of LATAM with its MXN liquidity being transparent and electronic and unfettered by capital controls.  The bond market is big enough for international flows and the yields remain attractive.

Trade Idea for May 2nd, 2013 – Buy Pullbacks in USD/JPY and JPY Crosses

An opportunity to buy into pullbacks on yen pairs (AUD/JPY, NZD/JPY, CAD/JPY, USD/JPY) is still a tempting proposition despite the doubts many traders have about what the BOJ may/can/will do next to keep the pressure on the yen.

If this morning’s yen volatility didn’t already grab your attention (on the unusual Kuroda timeline for recovery clarity come mid-2013) perhaps the the triple digit Dow rally has – and then means more “risk on” pressure for the yen. But there is that little matter of tomorrow NFP to contend with…

The issue – and traders MUST consider multiple scenarios before the reality hits – is this: NFP will set the tone for the first part of Summer in terms of equities and the U.S. Dollar. In many ways the U.S. Dollar IS the easier play because it’s a more straight forward thought process. If the jobs number(s) beats then QE begins to look like a dinosaur going extinct by year’s end. I say “numbers” because there is the March revision to consider! And traders know the revisions are as much part of the overall game of NFP as the headline numbers.

The USD/JPY then would be a perfect opportunity to buy dollars and sell yen on a strong headline number (consider the revision too because a flat headline and a upward revision would offer a risk ON opportunity as well). But what IF the number or both numbers are disappointing? The USD/JPY is going to fire on both cylinders and head lower on dollar weakness and yen strength.

Another two scenarios would then be to play the yen against currencies that have some strength of their own and this would include the NZD/JPY and CAD/JPY. The RBNZ is likely to “sit on their hands” (shout-out to Livermore there) despite an exchange rate that is higher than they would like, and the BOC remains the most hawkish of the G7. Thus a yen weakness play against either looks solid but if the numbers miss, yes, both these comm-dolls could weaken but perhaps not as badly as the greenback. But that bring up another discussion and I mention just for the sake of keeping it in the back of your mind: If the numbers miss, QE is here to stay through midyear easily and perhaps into 2014. Would equities traders rally the market on that prospect?

I would be a buyer on yen-based pairs at what I call “wishlist” prices, in other words, I want a low price that would likely be hit on the NFP volatility. The risk is this is that if the number is so clearly better-than-expected, there may be no downside correction, in which case the entire play is a short-term intraday “momo” (momentum) sprint. By the way, these longer-term correction entries have a shelf beyond tomorrow’s data. I use a combination of uptrend support levels, past lows, and price movement range studies to come up with these prices which I will park with limit orders.

For the USD/JPY I will be a buyer at 96.20; just below the 50DMA (daily moving average) is my stop loss. A more aggressive trader could build a position around the 97.00 major psychological level.

Trade of the Day for May 3rd – Buy AUD Bounce

Traders are attributing recent AUD/USD weakness to two main factors – weakness in the economy in China weighing on commodities, and the potential for the RBA to cut rates at its meeting next week. However, a number of factors point to a potential reversal in AUD weakness. Higher oil markets, the potential for US Non-farm Payrolls data to paint a stronger global growth picture, and recent respect of technical support, all favour AUD/USD longs.

Forex News Trade of the Day for April 30th – Short USD/JPY

USD/JPY may correct lower within longer term bull channel

The failure of USD/JPY to reach the 100.00 level and doubts that the Bank of Japan policy action is sufficient to reach its 2% inflation target within a 2-year time frame have resulted in a near term correction lower in the pair. Net speculative yen positioning as reported by the CFTC’s Commitment of Traders report showed that net shorts were trimmed by 13,681 to -79,730 with a reduction in gross shorts of 14,187. For now, traders seem to be taking profits on USD/JPY longs as central bank action in the respective countries appears set to remain on hold for the time being.

The Bank of Japan has indicated that steps taken were sufficient and are seemingly content to refrain from providing additional measures for now. This has slowed the pace of the decline in the JPY. In the US, the Fed has stepped back from previous rhetoric regarding a tapering of asset purchases as economic data has been soft (inflation and employment figures in particular) which signals the need for ongoing support from the central bank. Continued easing by the Fed may weigh on US treasury yields and the USD while no additional measures from the BoJ is likely to see the JPY and JGB yields slow their declines. Taken together, the implications are for USD/JPY to drift lower for now.

What’s more is that Japanese investors have not participated in yen selling as flow data from Japan’s Ministry of Finance have shown Japanese investors as net sellers of foreign securities. Market participants will be closely monitoring the flow data for a shift in flows as many Japanese asset managers have expressed the likelihood of committing capital overseas in search of yield. Until data confirms the outflow of JPY, the yen may continue to consolidate.

We think that USD/JPY is set to decline further in the near term as it corrects within a longer-term bullish channel. The outlook for the pair is still constructive from a strategic view, however the tactical play looks to be for a move lower. A close below the 21-day simple moving average (SMA) suggests continued downside and brings into view the convergence of the 55-day SMA and 61.8% Fibonacci retracement of the rally from April lows to highs. This area is around the 95.40/60 zone and is currently just above rising channel support. In our view, we are bearish while the pair trades below the 21-day SMA which is currently around the 98.00 figure. A close above may see a rally towards the 100 figure and break above that would likely see another leg higher.