Markets have been on a roller coaster ride. Here are our latest forex trading ideas: Dollar Index (DXY), NZD/CHF, and USD/MXN.
Markets overview
We were correct to express a bullish view on the dollar in recent weeks, as the US debt ceiling rise stalemate is causing some cracks in markets and the Fed recently provided hawkish views. We believe it is prudent to maintain a tactical positive stance on safe-haven assets in contrast to riskier ones.
The US dollar index (DXY) is on track for the third straight week of gains, driven by drops in EUR/USD and GBP/USD, as well as sharp increases in the Fed-sensitive USD/JPY.
US President Joe Biden is still negotiating with Republicans to extend the US debt limit and save the government from running out of money by June, which is the deadline fixed by Treasury Secretary Janet Yellen.
Anxiety has taken center stage in the bond market and partially in the FX market as time runs out without an agreement, but stocks have so far been left out of the equation.
The yield on one-month Treasury bills, a gauge of market fears over US debt ceiling negotiations, has spiked to over 5.8%, as the time of this writing, the highest level since data is available. The Treasury yield curve is displaying symptoms of stress, with significant inversion between short-term and long-term rates.
On the data front, the contraction in the manufacturing sector is intensifying in Europe. Flash PMI estimates for May revealed on Tuesday lower-than-anticipated manufacturing readings for the Euro Area (44.6 vs. 46.2 expected) and the United Kingdom (46.9 vs. 48 expected), while services continue to demonstrate expansions.
The week will be jam-packed with economic releases and central bank speakers, which can generate reactions in FX pairs. The USD will have flash PMIs on Tuesday, FOMC Meeting Minutes on Wednesday, and PCE inflation on Friday.
The EUR will absorb ECB speeches by De Guindos, Nagel, Villeroy, and De Cos throughout the week. The GBP will be sensitive to both CPI and BoE’s Governor Bailey speech on Wednesday, while the JPY can react to the Tokyo CPI on Thursday.
Open trades from past weeks:
- Short AUD/USD: Opened on May 16, at 0.6690; Target Price 0.636; Stop Loss 0.6825; P&L current +1%.
- Short XAG/USD: Opened on May 16, at $23.88; Target Price $22; Stop Loss $24.9; P&L current +2.75%.
- Long WTI spot: Opened on May 16 at $70.8; Target Price $80; Stop Loss $66.3; P&L current +1.4%.
- Short GBP/USD: Opened on May 8, at 1.2654, Target Price 1.227; Stop Loss 1.30; P&L current +1.9%
- Long EUR/JPY: Opened on May 8, at 149.16, Target Price 160; Stop Loss 142; P&L current +0.2%
- Long CAD/NZD: Opened on May 8, at 1.1803, Target Price 1.215; Stop Loss 1.165; P&L current -0.20%
- Long CAD/JPY: Opened on May 1, at 100.89; Target Price 104.3; Stop Loss 98.05; P&L current +1.4%.
- Short EUR/USD: Opened on April 24, at 1.0982; Target Price 1.07; Stop Loss 1.11; P&L current +1.7%
Closed trades:
- Long USD/JPY: Opened on April 24, at 134.35; Target Price 138; Stop Loss 132.5; P&L current +2.7%. Reason: Target hit.
DXY Trading Strategy: Riding the US Dollar's Upward Trend
Long DXY index: Opened at 103.5; Target Price 106; Stop Loss 102.17; Risk-reward-ratio of 2.22
The US dollar index (DXY) is exhibiting early symptoms of a new bullish wave in 2023, backed by both fundamental and technical considerations.
Both debt limit outcomes—deal or no-deal—would benefit the dollar, in our opinion. A deal might boost the dollar by raising US Treasury yields and Fed hawkishness. No-deal will cause significant risk-off and flight to havens. Only an agreement with major budget cuts and tax hikes (unlikely) will be dollar-negative. Recent Fed comments have been hawkish, with Bullard calling for two more rises this year and others saying to consider all options at the June meeting.
Technically, the DXY has broken above the 50-day moving average, when this happened in February the dollar extended its bullish wave until the banking crisis erupted in March.
The DXY has also retraced more than the 50% of the March-April bearish movement, according to the Fibonacci retracement analysis.
We believe the USD is positioned to be tactically strong versus other major currencies such as EUR, GBP, and JPY in the near future, and we favor the 106 level as a price target, which is close to both the 200dma and the 2023 high, with a stop slightly below the 50dma (102.17)
USD/MXN Trading Strategy: Symptoms Of Bullish Reversal
Long USD/MXN: Opened at 17.87; Target Price 18.8; Stop Loss 17.55; Risk-reward-ratio of 2.74
The USD/MXN pair bottomed out last week after plunging 11% year to date, and has subsequently registered five straight sessions of gains.
We believe that the upward momentum will continue since the Mexican peso is particularly sensitive to global risk.
On the data front, the Mexican inflation rate will be released on Wednesday, with investors anticipating it to fall further. If the print does not surprise to the upside, the Mexican peso will weaken. Overall, the pair will be dominated by US-related headlines about the debt limit and Fed speakers.
Technically, the pair is now testing a significant resistance zone around 17.80-17.90, which was a crucial support in March. For the first time since the end of March, the 50-day RSI above 50, signaling increased bullish optimism.
A break over the 18.00-18.05 area (both psychological and 50dma) might boost USD/MXN bulls' confidence, allowing to extend their rally to 18.80 (March 24 high) before aiming at the 200dma at 19.06.
XAU/USD Trading Strategy: Bulls Take a Breather
Order Long XAU/USD: Open at 1,900; Target Price 2,100; Stop Loss 1,830; Risk-reward-ratio of 2.9
Gold has retraced this month after briefly reaching an all-time high of 2,081 on May 4, as increasing Treasury yields and a stronger dollar drive precious metals to fall.
We believe the main trend is bullish since the November-March ascending channel prevails, but near-term weakness could accelerate due to liquidity concerns and a USD rally.
We don't see much of a downside here, but we expect a test of the 1,900/oz support, which would be an appealing entry point for purchasing gold for a medium-term view, with a target at $2,100/oz. The 200-dma, which is now $1,830/oz, would provide the level of stop.
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