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Focus on Currencies with Strong Trends
01/28/2013 9:00 am EST
Finding a steady trend in a single currency can make the difference in follow-through, as well as help determine which pairs to consider for an entry, writes Raghee Horner of InterbankFX.
The “strong kiwi” story and “weak yen” story has been reliable, so I look for confirmation of a continuation with just a single currency at times. For example, regardless of the recent pound sterling and Canadian dollar weakness, my expectation for those pairs to rally come from predominantly more yen weakness by comparison.
One of the first steps in any set-up for me is to determine the directional bias of the pair, in other words: Is it trending? For any trader who has watched the strong trends develop in yen pairs, it’s easy to understand it’s been more about yen weakness than the strength of the base currency in those pairs. In fact, IF and WHEN the base currency has been strong that really has been just another reason to look for more upside. The only reason any trader could be bearish a yen pair longer-term is IF they see a significant enough reason for the yen to strengthen OR expect more weakness from the base currency than the weakness expected from the yen.
The yen may have had two sessions of buying momentum—triggered by a BOJ that failed to meet the über-bearish expectation of traders—just above the 1.1100 major psychological level, but this is a shallow correction at best; one that did not even challenge the dynamic resistance of the 20DMA. Further support of the yen’s re-weakening can be found in the continual higher highs in the Dow Jones (YM).
I continue to like the New Zealand dollar strength story as it benefits from the strong and steady Chinese data without the overhang of a dovish central bank (like the aussie has). In fact it has been one of the strongest currencies through the month and the strongest of the comm-dolls.
Playing the NZD/JPY long set-ups is ideally suited for traders looking to take advantage of a weak yen and the strong kiwi, which together have this pair “firing on both cylinders”! Even if/when the kiwi weakens, expectations are for resumed strength and there is little doubt that the yen will outpace any kiwi weakness in the longer term, hence pullbacks will be bought fairly aggressively.
Another pair that has ended up on my radar is the GBP/NZD. With a fresh downtrend confirmed by the consecutive red GRaB candles and “four to six o’clock” 34EMA Wave, bounce in this pair on pound strength and/or kiwi weakness should be sold unless the RBNZ changes their tune to hold rates steady. The MPC last week took any wind there was in the pound’s sails and accelerated the bearish sentiment and momentum.
By Raghee Horner, Chief Currency Analyst, InterbankFX
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