Successful pro forex traders and fund managers have characteristics that set them apart from the crowd.

After all they represent the 5% that make it a full time lucrative income so it is worth investigating why. Here we will focus on just one ability, that they share and the underlying reason why the other 95% either fail or give up.

What sets them apart is is simply the ability to adapt to ever changing and shifting market environments.

An aspect of this ability is the process of constant reassessment, on the basis of data, events, or sentiment and be prepared to shift focus or perception at any time. That includes releasing the need to be right. In the case of the pro trader, right doesn’t exist only what is appropriate.

The weeks events centering once again around the USD data and its implications on policy , gave us the perfect example. Nothing has changed at the essential level of global economic comparatives. The US is still intending a rate rise, speculate as we may about the date and unless an extraordinary event occurs it will be the first in a world of global easing and deflationary preventative strategies. Nothing new there.

Trading the USD as soft data continues to appear, is as we have seen in the last few weeks, very differentand challenging. To decide how to handle this we have to understand the market sentiment and the market environment. Simple stuff.

Well yes, simple but may be not easy. Two weeks ago I wrote about the US correction and the uncertainty that lay behind its extent. Last week I discussed the increasing number of ranges appearing in the market. That is a key. There is no fundamental basis upon which to short the USD in the context of a trend.

Precisely because the US is in recovery, and has hit a period of uncertainty about the strength of that recovery , the market has paused to consider the relative strength of the dollar itself. Hence the range. Once that environment is confirmed there is every justification to short the dollar within the defined range if the trader is at ease with such an environment.

The alternative is to wait for the strengthening trend to resume. What is important is that opting to trade the range brings with it a need to keep the bigger picture in mind and to continue to monitor it.. Don’t lose sight of the wood for the trees.

 

The Data Environment

US economic releases

The focus was on NFP and it returned the lowest addition since December 2013. Here is what rattled the market on admittedly thin volumes on Good Friday; chart courtesy of tradingeconomics.com

 

The USD recalling the FOMC warnings of data dependence reflected the mood . Here is the index, obviously at a critical technical level to watch;

 

It is still, however, within the bounds of a non aggressive pullback not yet at the weekly 23rd Fib. It is also at a critical daily trend-line.

The safe approach would be to wait the break of this index before considering any USD shorting of established ranges. If it doesn’t then a wait and watch approach for trend development and resumption would be preferable.

Oil and commodity currencies

Oil is still vulnerable to downside pressure. There is evidence of slowing production in the US following rig closures, but inventories ae still growing and Iran is an event risk if an agreement is reached. Not much movement during the holiday week but slightly down holding the daily trendline.  Commodities fell a little further ;

These factors will continue to weigh on the commodity currencies, and most particularly the CAD but dollar correction may bring temporary strength to this currency. It has been in a range and if broken may move to a lower buying opportunity.

 

The Euro is most vulnerable to event risk via the Greek situation which vacillates almost daily, either ready to repay IMF loan balances or on the verge of going broke. No consent has yet been given by Brussels to the reform proposals. Its an economic hot potato. Add to that the QE monthly instalments and sinking bond yields.

Hard to see any thing on the horizon after the market has figured out the US correction, that can strengthen the EZ currency

Rate decisions

GBP rattled by pre election jitters and not much hope of avoiding some kind of ‘hung’ parliament, and in a dis-inflationary environment with disappointing data beginning to become a regular event, is another candidate for declining value.

Expect volatility , with an election looming anything is possible from the BOE in terms of the statement although there is no expectation for any moves in the rate.

On Tuesday the RBA will make its rate decision , there is some speculation growing for another rate cut though  the consensus is for the current rate to hold. As we have seen, the Aussie is vulnerable to the commodity pressures but in assessing how far the USD will correct a rate hold might well be the catalyst to push it further. Again this does not affect the underlying.

On Wednesday, the BOJ will announce their rate decision. The Japanese economy is seen by the BOJ as making progress towards recovery. Technically the economy officially pulled out of recession at the end of last year, but whilst Kuroda has not seen enough downside risk to inflation to ease further he has confirmed he will be prepared to do so if inflation factors warrant it. If the rate holds this week , it may well give the JPY some strength of its own even against the USD dealing with the negatives of last week.

The Sentiment Environment

 S&P

another critical watch of a level to see if risk aversion is setting in

 

 

The deferral of rate hikes implied by the latest NFP numbers should bring a little buoyancy to equities. Once the rate hike is back in contention then we could expect the equity markets in the US to start considering not only a stronger dollar but the need for there to be real growth rates before shares can accrue any more value. Perceived and real overvaluation can easily become a catalyst for risk aversion.

VIX and FX volitility

Whilst the vix, the fear index of the S & P  is still in ‘low’ territory, and in fact fell back this week, the volatility in the forex is noticeably increasing

Volatility IS a new and challenging factor in the forex market and trading has to be adapted to deal with it.

Bonds and Yields

US Treasury bond yields lost ground as a result of advance NFP numbers on Wednesday missing their expected number and closing further down on Fridays NFP numbers and adding, as the FT terms it, to ‘rate setters mood of caution’

Similarly, the European bond yields slipped even further.

 Gold

A strong day on Wednesday and three weeks of advances. For the technical traders a daily inverse head and shoulders worth watching!

 

Review of Event Risks

1. The major focus continues to be the Eurozone  issues with Greece and the mixed messages coming from both sides are adding to an already fragile and uncertain outcome

2. RBA on Tuesday

3. BOJ Wednesday

4. FOMC minutes released Wednesday

5. China CPI Friday

In addition a slew of PMI’s including US ISM non manufacturing PMI and Canadian employment change.

 

The Bigger picture

Of course understanding the disappointment and volatality currently displayed in the market following one or two pieces of data is only possible if seen in the context of the US recovery and the evolving policy from the Fed.

Even then one has to wonder on the basis of the reactions we have seen, what would happen if there was a major black swan event in an already sensitive market.

Whilst we are watching the USD for temporary weakness,  Euro weakness is still very much in evidence.  Whatever improved data the EZ may produce it is doubtful that it can  sustain a euro rally in the light of QE and sinking bond yields even without factoring in event risks. Any break upwards is all about USD uncertainty.

The current phase of USD correction, for the brave range and counter trend traders may well present opportunities in the week ahead.  The precaution is to find  identified ranges or wait lower buy levels  If the USDX does confirm a deeper pullback I still would not long the EURUSD but wait for a better shorting level. It is simply too fragile and risk ‘vulnerable’.

Conclusion

The market is demanding different focal points. Sentiment, predictable risk factors, a ranging environment and increasing volatility call for a different risk protection and tool set.

A chameleon survives in a the same jungle from year to year but only if he adapts to the changes in temperature and environmental conditions . Sometimes the word chameleon is used to describe a person…changeable, fickle and inconstant. I think that well describes the market we trade.

Time to change and  adapt without forgetting we operate in a jungle of our own.

Judith Waker

Fotis Trading Academy

The Forex Chameleon