Trading Analysis for the short term of 10/13/16

The dollar hasn’t been continuing with its depreciation pattern since the start of 2016. Basically, all 2016 the DXY has stay in the high nineties. There are many factors that may have contributed to a high dollar. One of them is the Brexit.

When the British left the European Economic Union, it created an exit of capital to a more secure heaven, in this case the dollar with the FED increasing the overnight interest rate. This idea could be one of the factors that may contribute to a high dollar.

Economists are still expecting inflation, the FED wants inflation, and the US dollar is expected to depreciate. This speculation is not set in stone. The dollar could not depreciate and inflation may not pick up, but the probability of that is smaller than inflation picking up, and the dollar depreciating. With this knowledge, it is useful to trade accordingly.

Positions across the board are being setting up. One example is the New Zealand Dollar against the United States Dollar. The New Zealand Dollar has been in an up pattern since September of 2015. In resents weeks, the New Zealand Dollar (NZD) has been depreciating against the dollar. The NZDUSD pair is about to hit a stablish resistance around .70. The pair could hit below .70 to .67 and be fluctuating around those prices. This trend is really fissile if inflation is expected to go higher, and the dollar depreciates.

Right now, it is advisable to stay off the markets until the FED increases its overnight interest rate which is expected in December. From there it is advisable to see whether the pattern of appreciation of NZD continues or goes the other way. If the pattern continues then it could be stablish that NZD may keep appreciated for a long time.

Among other currencies that may have a good setup trade are: Australian Dollar against the United States Dollar, the European Euro against the United States dollar, and the United States Dollar against the Canadian Dollar. 

Status of the Market

The US dollar has been going down since it hit the 100 mark on the DXY index and it’s expected to depreciate some more. At the moment Saturday, June 11, 2016, the DXY is at: 94.66. The FED has been precarious with the increment of the federal fun interest rate. They want to make sure the economic data like inflation and unemployment rate are solid. Janet Yellen emphasizes on her last statement that they need to make sure their economic indicators are a line with their economic policy. They are also precarious with international data like the British vote on the exit from the EU, slow down in China, and international markets. All this economic data will create volatility in the markets for the short to medium term. The FED is also taking into account the US market which at the moment is in a bull market and a more hawkish FED would create fear among investors which could stop the bull market. The S&P 500 stand at 2,096.07 and it looks like is going to break records highs.

One of the FED important indicators is inflation which stands below their 2% mark. The FED goal is to create inflation which creates depreciation on the currency. That is because prices will go higher and we’ll need more money to buy something. For example, if the price of food is at $10 and increases by 2% that would equal to $12. That means that the value of the $US Dollar has gone down. Now it cost $12 to buy something that use to cost $10.  Other currencies like AUD and CAD will see appreciation. This is because AUD and CAD are commodity currencies and if we want increment in prices, the basic commodities prices will have to increase. This is because to create inflationary prices in one country, the importers prices will go up. This could be seen on the appreciation of the AUD and CAD.

Next week the FED will decide whether to increase their interest rate or leave it as it is. The FED is expected to leave their interest rate as it is, but there is a chance that they might increase it. If the FED leaves it’s interest rate at .50 there’s a high probability that the US dollar is going to depreciate. This idea coincides with the FED economic policy and technical indicators on currency pairs like USDCAD and AUDUSD. If the FED increases their interest rate there’s a probability that the US dollar will go up but then it is expected to go down. 

Japan is going to start QQE Program.

The U.S. dollar index which is measure by the DXY looks like it’s going to try to break the 100 mark. This comes after the BoJ announcement of monetary easing program call QQE.

QQE program stands for Quantitative and Qualitative Monetary Easing with a Negative Interest Rate. QQE is to achieve a price stability of 2 percent at the earliest possible time.

The BoJ bank is going to pursue monetary easing by making full use of three dimensions which are: quantity, quality, and interest rate.

Interest rate dimension: The bank will apply a negative interest rate of minus 0.1 percent. It will cut the interest rate further into negative territory if judged as necessary.

Quantity Dimension: The Bank of Japan will conduct money market operations so that the monetary base will increase at an annual pace of about 80 trillion yen.

Quality Dimension: The Bank will purchase Japanese government bonds (JGBs). The bank will purchase exchange-trade funds (ETFs) and Japan real estate investment trust (J-REITs). As for CPI and corporate bonds, the bank will keep on purchasing them on the same rate.

QQE with a Negative Interest Rate program is aim to achieve price stability target of 2 percent as long as it is necessary for maintaining that target in a stable manner. The bank will examine risks to economic activity and prices, and take additional easing measures in terms of three dimensions – quantity, quality, and interest rate.

At January 29, 2016, 5:03 p.m. EST. the DXY is at 99.53. This is a .95 percent increase from its previous close. The S&P 500 also increased by 2.48 percent. This is after a 2.80 percent increase of the Nikkei 225 and a 2.56 increase of the FTSE 100 index.

With the QQE program there is a high probability of increases in the securities markets and the U.S. Dollar. There were also increases in commodity based currency like the Australian Dollar and Mexican Peso, which is normal because the BoJ wants to create inflation of 2 percent. Inflation at 2 percent is the goal for most of  central banks. My financial base strategy is to go short on the yen and long on securities and more risky assets. It seems the investors are willing to in invest in more risky assets like securities to lure profitability. The VIX index which sometime is called the fear index, is at 20.20 a 9.90 percent decrease. 

Friday, January 1 2016

The US Dollar index that is measure by DXY hasn’t been able to break the 100.00 mark. On January 15, 2016, 3:23pm EST, DXY stands at 98.88 that’s -0.19% from the previous day. Even though The FED has started it’s expansion policy and the overnight interest rate has gone up to 0.50 from 0.25, the DXY index is having trouble breaking the 100.00 nark.

The FED is planning to increase their interest rate throughout 2016 unless economical indicators like low inflation or a worsening job market arises. The increasing of the FED’s interest rate creates a high probability of a bullish DXY. The bullish trend would cancel if we still have good economic data from the US like increase in interest rate and the DXY not breaking the 100.00.

Commodity currencies like the NZD and AUD have been dropping along with the security markets and are expected to continue dropping for the short to medium time. 

I’m still bullish on the dollar especially with the commodity currencies, but I’m precarious about being at the end of the trend. Our incoming data are indicating that we might be hitting the end of the trend and we are planning accordingly to maximize profit.