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Currencies Pointing to a Bit More Upside for Risk Assets


The bell may not yet be tolling for equity and risk bulls, but it's possible that Quasimoto is readying the ropes.

My call has been for a move up to around 1,700 on the S&P (INDEXSP:.INX) futures, a modest consolidation (perhaps down to 1,665 - 1,667) and then one more run to around 1,738. So far, I'm on track to being correct with that call – and the action in currencies this week seems to be fitting this overall thesis. Once we see the resumption in trouble for the euro, the Canadian dollar, and the Aussie dollar, I'm guessing that the equity markets will face some more challenges – although any 10%+ pullback that we do experience will be a correction in the macro bull trend.

Let's take a look at what the currency markets are telling us this week.


Currency Futures

Here's a look at the currency futures contracts, which can help us to get a feel for the overall risk appetite for the markets:

So, overall, it is very difficult to glean any real macro messages from the currency markets right now. We have mixed messages in terms of the rising yen, the falling dollar, and the rising euro (as well as the rising franc and Canadian dollar). It certainly seems like the truth-teller is the Aussie dollar regarding China's situation, while the other contracts are either in countertrend moves or are being temporarily influenced by those countries' central bank actions. Once the next sizeable moves commence, we are likely to see strength in the US dollar and the yen while the euro, the Aussie dollar, and Canadian dollar will be under pressure, which sounds more like a "risk-off" scenario than a "risk-on" scenario.

Following the Majors

For those readers looking for some specific trade ideas, I have compiled the following list of analyses on each of the forex "major" pairs. These are the pairs that trade the most volume every day and that tend to have more reliable trading patterns / action than many other pairs.

If you are going to trade in forex at all, you must understand the leverage and danger involved via headline risk. Crazy moves can occur – even with the "majors" that can, if you are not uber-careful, vaporize your hard-earned cash. You must utilize a stop-loss discipline and have the psychological make-up to take those losses when they come – because they will come. The good news is that if you are good about taking losses, you may stay in the game long enough to experience the potential gains as well.

The other risk management technique available is position size management. I would only venture into forex trading with a minimum of $25,000 and be trading a maximum of $100,000 notional value positions (typically between $2,000 and $3,500 margin required for $100,000 notional value). Plus, and perhaps most importantly, that $25,000 should be no more than 5% of your overall liquid investable assets. That means people with less than $500,000 in liquid investable risk capital really should not be wading into the forex waters.

All of that being noted, these are the trades I am looking to implement for my own and client portfolios at the appropriate times using the "majors."

Twitter: @seachangereport

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No positions in stocks mentioned.

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